UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-51404
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
Federally chartered corporation (State or other jurisdiction of incorporation or organization) | 35-6001443 (I.R.S. employer identification number) | |
8250 Woodfield Crossing Boulevard Indianapolis, IN (Address of principal executive offices) | 46240 (Zip code) |
(317) 465-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer | o Accelerated filer | o Emerging growth company |
x Non-accelerated filer (Do not check if a smaller reporting company) | o Smaller reporting company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | None | None |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares outstanding as of April 30, 2019 | ||
Class B Stock, par value $100 | 21,852,143 |
Table of Contents | Page | |
Number | ||
Glossary of Terms | ||
Special Note Regarding Forward-Looking Statements | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | FINANCIAL STATEMENTS (unaudited) | |
Statements of Condition as of March 31, 2019 and December 31, 2018 | ||
Statements of Income for the Three Months Ended March 31, 2019 and 2018 | ||
Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 | ||
Statements of Capital for the Three Months Ended March 31, 2018 and 2019 | ||
Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 | ||
Notes to Financial Statements: | ||
Note 1 - Summary of Significant Accounting Policies | ||
Note 2 - Recently Adopted Accounting Guidance | ||
Note 3 - Investment Securities | ||
Note 4 - Advances | ||
Note 5 - Mortgage Loans Held for Portfolio | ||
Note 6 - Allowance for Credit Losses | ||
Note 7 - Derivatives and Hedging Activities | ||
Note 8 - Consolidated Obligations | ||
Note 9 - Affordable Housing Program | ||
Note 10 - Capital | ||
Note 11 - Accumulated Other Comprehensive Income | ||
Note 12 - Segment Information | ||
Note 13 - Estimated Fair Values | ||
Note 14 - Commitments and Contingencies | ||
Note 15 - Related Party and Other Transactions | ||
Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
Presentation | ||
Executive Summary | ||
Selected Financial Data | ||
Results of Operations and Changes in Financial Condition | ||
Operating Segments | ||
Analysis of Financial Condition | ||
Liquidity and Capital Resources | ||
Off-Balance Sheet Arrangements | ||
Critical Accounting Policies and Estimates | ||
Recent Accounting and Regulatory Developments | ||
Risk Management | ||
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
Item 4. | CONTROLS AND PROCEDURES | |
PART II. | OTHER INFORMATION | |
Item 1. | LEGAL PROCEEDINGS | |
Item 1A. | RISK FACTORS | |
Item 6. | EXHIBITS |
As used in this Form 10-Q, unless the context otherwise requires, the terms "we," "us," "our," and the "Bank" refer to the Federal Home Loan Bank of Indianapolis or its management. We use acronyms and terms throughout that are defined herein or in the Glossary of Terms.
Special Note Regarding Forward-Looking Statements
Statements in this Form 10-Q, including statements describing our objectives, projections, estimates or predictions, may be considered to be "forward-looking statements." These statements may use forward-looking terminology, such as "anticipates," "believes," "could," "estimates," "may," "should," "expects," "will," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty and that actual results either could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
• | economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants; |
• | volatility of market prices, interest rates, and indices or other factors, resulting from the effects of, and changes in, various monetary or fiscal policies and regulations, including those determined by the FRB and the FDIC, or a decline in liquidity in the financial markets, that could affect the value of investments or collateral we hold as security for the obligations of our members and counterparties; |
• | changes in demand for our advances and purchases of mortgage loans resulting from: |
◦ | changes in our members' deposit flows and credit demands; |
◦ | federal or state regulatory developments impacting suitability or eligibility of membership classes; |
◦ | membership changes, including, but not limited to, mergers, acquisitions and consolidations of charters; |
◦ | changes in the general level of housing activity in the United States and particularly our district states of Michigan and Indiana, the level of refinancing activity and consumer product preferences; and |
◦ | competitive forces, including, without limitation, other sources of funding available to our members; |
• | changes in mortgage asset prepayment patterns, delinquency rates and housing values or improper or inadequate mortgage originations and mortgage servicing; |
• | ability to introduce and successfully manage new products and services, including new types of collateral securing advances; |
• | political events, including federal government shutdowns, administrative, legislative, regulatory, or other developments, and judicial rulings that affect us, our status as a secured creditor, our members (or certain classes of members), prospective members, counterparties, GSEs generally, one or more of the FHLBanks and/or investors in the consolidated obligations of the FHLBanks; |
• | ability to access the capital markets and raise capital market funding on acceptable terms; |
• | changes in our credit ratings or the credit ratings of the other FHLBanks and the FHLBank System; |
• | changes in the level of government guarantees provided to other United States and international financial institutions; |
• | dealer commitment to supporting the issuance of our consolidated obligations; |
• | ability of one or more of the FHLBanks to repay its portion of the consolidated obligations, or otherwise meet its financial obligations; |
• | ability to attract and retain skilled personnel; |
• | ability to develop, implement and support technology and information systems sufficient to manage our business effectively; |
• | nonperformance of counterparties to uncleared and cleared derivative transactions; |
• | changes in terms of derivative agreements and similar agreements; |
• | loss arising from natural disasters, acts of war or acts of terrorism; |
• | changes in or differing interpretations of accounting guidance; and |
• | other risk factors identified in our filings with the SEC. |
Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, additional disclosures may be made through reports filed with the SEC in the future, including our Forms 10-K, 10-Q and 8-K.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts in thousands, except par value)
March 31, 2019 | December 31, 2018 | ||||||
Assets: | |||||||
Cash and due from banks | $ | 73,099 | $ | 100,735 | |||
Interest-bearing deposits | 316,530 | 1,210,705 | |||||
Securities purchased under agreements to resell | 3,297,519 | 3,212,726 | |||||
Federal funds sold | 3,100,000 | 3,085,000 | |||||
Trading securities (Note 3) | 1,121,889 | — | |||||
Available-for-sale securities (Note 3) | 8,408,391 | 7,703,596 | |||||
Held-to-maturity securities (estimated fair values of $5,456,391 and $5,676,145, respectively) (Note 3) | 5,454,506 | 5,673,720 | |||||
Advances (Note 4) | 32,830,084 | 32,727,668 | |||||
Mortgage loans held for portfolio, net of allowance for loan losses of $(600) and $(600), respectively (Notes 5 and 6) | 11,398,486 | 11,384,978 | |||||
Accrued interest receivable | 132,955 | 124,611 | |||||
Premises, software, and equipment, net | 36,645 | 37,198 | |||||
Derivative assets, net (Note 7) | 175,687 | 116,764 | |||||
Other assets | 36,976 | 33,998 | |||||
Total assets | $ | 66,382,767 | $ | 65,411,699 | |||
Liabilities: | |||||||
Deposits | $ | 698,727 | $ | 500,440 | |||
Consolidated obligations (Note 8): | |||||||
Discount notes | 21,254,090 | 20,895,262 | |||||
Bonds | 40,375,525 | 40,265,465 | |||||
Total consolidated obligations, net | 61,629,615 | 61,160,727 | |||||
Accrued interest payable | 179,334 | 179,728 | |||||
Affordable Housing Program payable (Note 9) | 42,841 | 40,747 | |||||
Derivative liabilities, net (Note 7) | 1,388 | 21,067 | |||||
Mandatorily redeemable capital stock (Note 10) | 174,202 | 168,876 | |||||
Other liabilities | 517,941 | 289,665 | |||||
Total liabilities | 63,244,048 | 62,361,250 | |||||
Commitments and contingencies (Note 14) | |||||||
Capital (Note 10): | |||||||
Capital stock (putable at par value of $100 per share): | |||||||
Class B-1 issued and outstanding shares: 19,850,109 and 19,306,333, respectively | 1,985,011 | 1,930,633 | |||||
Class B-2 issued and outstanding shares: 3,192 and 3,192, respectively | 319 | 319 | |||||
Total capital stock | 1,985,330 | 1,930,952 | |||||
Retained earnings: | |||||||
Unrestricted | 855,314 | 855,311 | |||||
Restricted | 229,136 | 222,499 | |||||
Total retained earnings | 1,084,450 | 1,077,810 | |||||
Total accumulated other comprehensive income (Note 11) | 68,939 | 41,687 | |||||
Total capital | 3,138,719 | 3,050,449 | |||||
Total liabilities and capital | $ | 66,382,767 | $ | 65,411,699 |
The accompanying notes are an integral part of these financial statements.
4
Federal Home Loan Bank of Indianapolis
Statements of Income
(Unaudited, $ amounts in thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest Income: | ||||||||
Advances | $ | 211,754 | $ | 143,794 | ||||
Interest-bearing deposits | 4,266 | 3,208 | ||||||
Securities purchased under agreements to resell | 19,814 | 5,097 | ||||||
Federal funds sold | 20,381 | 12,288 | ||||||
Trading securities | 2,801 | — | ||||||
Available-for-sale securities | 49,481 | 40,566 | ||||||
Held-to-maturity securities | 40,884 | 34,920 | ||||||
Mortgage loans held for portfolio | 96,253 | 83,554 | ||||||
Other interest income | — | 12 | ||||||
Total interest income | 445,634 | 323,439 | ||||||
Interest Expense: | ||||||||
Consolidated obligation discount notes | 119,374 | 70,358 | ||||||
Consolidated obligation bonds | 263,009 | 178,228 | ||||||
Deposits | 2,994 | 1,977 | ||||||
Mandatorily redeemable capital stock | 2,718 | 2,745 | ||||||
Total interest expense | 388,095 | 253,308 | ||||||
Net interest income | 57,539 | 70,131 | ||||||
Provision for (reversal of) credit losses | 54 | (104 | ) | |||||
Net interest income after provision for credit losses | 57,485 | 70,235 | ||||||
Other Income: | ||||||||
Net gains on trading securities | 4,071 | — | ||||||
Net gains (losses) on derivatives and hedging activities | (3,422 | ) | 5,932 | |||||
Service fees | 193 | 225 | ||||||
Standby letters of credit fees | 159 | 98 | ||||||
Other, net | 2,015 | (68 | ) | |||||
Total other income (loss) | 3,016 | 6,187 | ||||||
Other Expenses: | ||||||||
Compensation and benefits | 14,133 | 12,977 | ||||||
Other operating expenses | 5,974 | 6,418 | ||||||
Federal Housing Finance Agency | 996 | 920 | ||||||
Office of Finance | 1,136 | 1,191 | ||||||
Other | 1,088 | 891 | ||||||
Total other expenses | 23,327 | 22,397 | ||||||
Income before assessments | 37,174 | 54,025 | ||||||
Affordable Housing Program assessments | 3,989 | 5,677 | ||||||
Net income | $ | 33,185 | $ | 48,348 |
The accompanying notes are an integral part of these financial statements.
5
Federal Home Loan Bank of Indianapolis
Statements of Comprehensive Income
(Unaudited, $ amounts in thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 33,185 | $ | 48,348 | ||||
Other Comprehensive Income: | ||||||||
Net change in unrealized gains on available-for-sale securities | 26,905 | 22,553 | ||||||
Net non-credit portion of other-than-temporary impairment losses | — | 29 | ||||||
Pension benefits, net | 347 | 323 | ||||||
Total other comprehensive income | 27,252 | 22,905 | ||||||
Total comprehensive income | $ | 60,437 | $ | 71,253 |
The accompanying notes are an integral part of these financial statements.
6
Federal Home Loan Bank of Indianapolis
Statements of Capital
Three Months Ended March 31, 2018 and 2019
(Unaudited, $ amounts and shares in thousands)
Capital Stock | Retained Earnings | Accumulated Other Comprehensive Income | Total Capital | ||||||||||||||||||||||||
Shares | Par Value | Unrestricted | Restricted | Total | |||||||||||||||||||||||
Balance, December 31, 2017 | 18,578 | $ | 1,857,766 | $ | 792,783 | $ | 183,551 | $ | 976,334 | $ | 111,406 | $ | 2,945,506 | ||||||||||||||
Total comprehensive income | 38,678 | 9,670 | 48,348 | 22,905 | 71,253 | ||||||||||||||||||||||
Proceeds from issuance of capital stock | 231 | 23,179 | 23,179 | ||||||||||||||||||||||||
Cash dividends on capital stock (6.75% annualized) | (31,014 | ) | — | (31,014 | ) | (31,014 | ) | ||||||||||||||||||||
Balance, March 31, 2018 | 18,809 | $ | 1,880,945 | $ | 800,447 | $ | 193,221 | $ | 993,668 | $ | 134,311 | $ | 3,008,924 | ||||||||||||||
Balance, December 31, 2018 | 19,310 | $ | 1,930,952 | $ | 855,311 | $ | 222,499 | $ | 1,077,810 | $ | 41,687 | $ | 3,050,449 | ||||||||||||||
Total comprehensive income | 26,548 | 6,637 | 33,185 | 27,252 | 60,437 | ||||||||||||||||||||||
Proceeds from issuance of capital stock | 564 | 56,487 | 56,487 | ||||||||||||||||||||||||
Shares reclassified to mandatorily redeemable capital stock, net | (21 | ) | (2,109 | ) | (2,109 | ) | |||||||||||||||||||||
Cash dividends on capital stock (5.50% annualized) | (26,545 | ) | — | (26,545 | ) | (26,545 | ) | ||||||||||||||||||||
Balance, March 31, 2019 | 19,853 | $ | 1,985,330 | $ | 855,314 | $ | 229,136 | $ | 1,084,450 | $ | 68,939 | $ | 3,138,719 |
The accompanying notes are an integral part of these financial statements.
7
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Operating Activities: | |||||||
Net income | $ | 33,185 | $ | 48,348 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Amortization and depreciation | 18,150 | 15,140 | |||||
Changes in net derivative and hedging activities | (114,276 | ) | 95,082 | ||||
Provision for (reversal of) credit losses | 54 | (104 | ) | ||||
Net change in fair-value adjustments on trading securities | (4,071 | ) | — | ||||
Changes in: | |||||||
Accrued interest receivable | (11,354 | ) | (2,128 | ) | |||
Other assets | (1,394 | ) | 651 | ||||
Accrued interest payable | (568 | ) | 5,063 | ||||
Other liabilities | (1,918 | ) | 3,290 | ||||
Total adjustments, net | (115,377 | ) | 116,994 | ||||
Net cash provided by (used in) operating activities | (82,192 | ) | 165,342 | ||||
Investing Activities: | |||||||
Net change in: | |||||||
Interest-bearing deposits | 823,372 | (228,149 | ) | ||||
Securities purchased under agreements to resell | (84,793 | ) | (67,740 | ) | |||
Federal funds sold | (15,000 | ) | 532,000 | ||||
Trading securities: | |||||||
Purchases | (1,117,818 | ) | — | ||||
Available-for-sale securities: | |||||||
Proceeds from maturities | — | 12,781 | |||||
Purchases | (315,000 | ) | (236,181 | ) | |||
Held-to-maturity securities: | |||||||
Proceeds from maturities | 216,391 | 163,884 | |||||
Purchases | — | (264,633 | ) | ||||
Advances: | |||||||
Principal repayments | 116,068,059 | 85,397,827 | |||||
Disbursements to members | (116,072,114 | ) | (84,411,165 | ) | |||
Mortgage loans held for portfolio: | |||||||
Principal collections | 244,645 | 279,197 | |||||
Purchases from members | (257,582 | ) | (429,338 | ) | |||
Purchases of premises, software, and equipment | (1,113 | ) | (1,413 | ) | |||
Loans to other Federal Home Loan Banks: | |||||||
Principal repayments | — | 300,000 | |||||
Disbursements | — | (300,000 | ) | ||||
Net cash provided by (used in) investing activities | (510,953 | ) | 747,070 |
(continued)
The accompanying notes are an integral part of these financial statements.
8
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Financing Activities: | |||||||
Changes in deposits | 115,127 | (43,740 | ) | ||||
Net payments on derivative contracts with financing elements | (975 | ) | (2,324 | ) | |||
Net proceeds from issuance of consolidated obligations: | |||||||
Discount notes | 95,442,803 | 89,946,844 | |||||
Bonds | 5,429,231 | 4,364,745 | |||||
Payments for matured and retired consolidated obligations: | |||||||
Discount notes | (95,087,066 | ) | (90,751,935 | ) | |||
Bonds | (5,366,770 | ) | (4,396,040 | ) | |||
Proceeds from issuance of capital stock | 56,487 | 23,179 | |||||
Proceeds from issuance of mandatorily redeemable capital stock | 3,704 | — | |||||
Payments for redemption/repurchase of mandatorily redeemable capital stock | (487 | ) | (540 | ) | |||
Dividend payments on capital stock | (26,545 | ) | (31,014 | ) | |||
Net cash provided by (used in) financing activities | 565,509 | (890,825 | ) | ||||
Net increase (decrease) in cash and due from banks | (27,636 | ) | 21,587 | ||||
Cash and due from banks at beginning of period | 100,735 | 55,269 | |||||
Cash and due from banks at end of period | $ | 73,099 | $ | 76,856 | |||
Supplemental Disclosures: | |||||||
Interest payments | $ | 379,523 | $ | 239,477 | |||
Purchases of securities, traded but not yet settled | 225,222 | — | |||||
Affordable Housing Program payments | 1,895 | 2,757 | |||||
Capitalized interest on certain held-to-maturity securities | 1,160 | 1,620 | |||||
Par value of shares reclassified to mandatorily redeemable capital stock, net | 2,109 | — |
The accompanying notes are an integral part of these financial statements.
9
Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 1 - Summary of Significant Accounting Policies
We use acronyms and terms throughout these Notes to Financial Statements that are defined herein or in the Glossary of Terms. Unless the context otherwise requires, the terms "Bank," "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis or its management.
Basis of Presentation. The accompanying interim financial statements have been prepared in accordance with GAAP and SEC requirements for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. Certain disclosures that would have substantially duplicated the disclosures in the financial statements, and notes thereto, included in our 2018 Form 10-K have been omitted unless the information contained in those disclosures materially changed. Therefore, these interim financial statements should be read in conjunction with our audited financial statements, and notes thereto, included in our 2018 Form 10-K.
The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full calendar year or any other interim period.
Our significant accounting policies and certain other disclosures are set forth in our 2018 Form 10-K in Note 1 - Summary of Significant Accounting Policies. See Note 2 - Recently Adopted and Issued Accounting Guidance for the changes effective January 1, 2019.
Use of Estimates. When preparing financial statements in accordance with GAAP, we are required to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant estimates pertain to derivatives and hedging activities, fair value and provision for credit losses. Although the reported amounts and disclosures reflect our best estimates, actual results could differ significantly from these estimates.
Note 2 - Recently Adopted Accounting Guidance
Recently Adopted Accounting Guidance.
Leases (ASU 2016-02). On February 25, 2016, the FASB issued guidance which requires a lessee, in an operating or finance lease, to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize a lease asset and lease liability. Under previous guidance, a lessee was not required to recognize a lease asset and lease liability arising from an operating lease on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.
This guidance was effective for the interim and annual periods beginning on January 1, 2019. Upon adoption, we reported higher assets and liabilities as a result of including right-of-use assets and lease liabilities on the statement of condition, but its effect on our financial condition, results of operations, and cash flows was not material.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). On March 30, 2017, the FASB issued guidance to shorten the amortization period for certain callable debt securities purchased at a premium. Specifically, the guidance requires the premium to be amortized to the earliest call date. No change is required for securities purchased at a discount, which continue to be amortized to their contractual maturities.
This guidance was effective for the interim and annual periods beginning on January 1, 2019. The adoption of this guidance had no effect on our financial condition, results of operations, or cash flows.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This guidance requires that, for fair-value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item.
This guidance was effective for the interim and annual periods beginning on January 1, 2019. The adoption of this guidance had no effect on our financial condition, net income, or cash flows. However, the adoption resulted in a prospective reclassification in the statement of income of net losses from the change in fair value of hedging instruments and related hedged items in
fair-value hedging relationships from other income to interest income for the three months ended March 31, 2019 of $13,876.
Inclusion of SOFR OIS Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16). On October 25, 2018, to facilitate the LIBOR to SOFR transition, the FASB issued guidance permitting the use of the OIS rate based on SOFR as an eligible U.S. benchmark interest rate for hedge accounting purposes.
This guidance was effective for the interim and annual periods beginning on January 1, 2019, concurrent with the adoption of ASU 2017-12. The adoption of this guidance had no effect on our financial condition, results of operations, or cash flows.
Note 3 - Investment Securities
Trading Securities.
In January 2019, the Bank began purchasing U.S. Treasury securities classified as trading securities.
Net Gains (Losses) on Trading Securities. The following table presents net gains (losses) on trading securities.
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net gains on trading securities held at period end | $ | 4,071 | $ | — | ||||
Net gains (losses) on trading securities that sold/matured during the period | — | — | ||||||
Net gains on trading securities | $ | 4,071 | $ | — |
Available-for-Sale Securities.
Major Security Types. The following table presents our AFS securities by type of security.
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
March 31, 2019 | Cost (1) | Gains | Losses | Fair Value | ||||||||||||
GSE and TVA debentures | $ | 4,294,155 | $ | 43,559 | $ | — | $ | 4,337,714 | ||||||||
GSE MBS | 4,034,345 | 43,958 | (7,626 | ) | 4,070,677 | |||||||||||
Total AFS securities | $ | 8,328,500 | $ | 87,517 | $ | (7,626 | ) | $ | 8,408,391 | |||||||
December 31, 2018 | ||||||||||||||||
GSE and TVA debentures | $ | 4,239,622 | $ | 37,458 | $ | — | $ | 4,277,080 | ||||||||
GSE MBS | 3,410,988 | 27,797 | (12,269 | ) | 3,426,516 | |||||||||||
Total AFS securities | $ | 7,650,610 | $ | 65,255 | $ | (12,269 | ) | $ | 7,703,596 |
(1) | Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal and, if applicable, fair-value hedging adjustments. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Unrealized Loss Positions. The following table presents impaired AFS securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
Less than 12 months | 12 months or More | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
March 31, 2019 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
GSE MBS | $ | 1,059,501 | $ | (6,396 | ) | $ | 138,418 | $ | (1,230 | ) | $ | 1,197,919 | $ | (7,626 | ) | |||||||||
Total impaired AFS securities | $ | 1,059,501 | $ | (6,396 | ) | $ | 138,418 | $ | (1,230 | ) | $ | 1,197,919 | $ | (7,626 | ) | |||||||||
December 31, 2018 | ||||||||||||||||||||||||
GSE MBS | $ | 1,256,816 | $ | (12,269 | ) | $ | — | $ | — | $ | 1,256,816 | $ | (12,269 | ) | ||||||||||
Total impaired AFS securities | $ | 1,256,816 | $ | (12,269 | ) | $ | — | $ | — | $ | 1,256,816 | $ | (12,269 | ) |
Realized Gains and Losses. There were no sales of AFS securities during the three months ended March 31, 2019. As of March 31, 2019, we had no intention of selling any AFS securities in an unrealized loss position nor did we consider it more likely than not that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost basis.
Held-to-Maturity Securities.
Major Security Types. The following table presents our HTM securities by type of security.
Gross | Gross | |||||||||||||||
Unrecognized | Unrecognized | |||||||||||||||
Amortized | Holding | Holding | Estimated | |||||||||||||
March 31, 2019 | Cost (1) | Gains | Losses | Fair Value | ||||||||||||
MBS: | ||||||||||||||||
Other U.S. obligations - guaranteed MBS | $ | 3,389,459 | $ | 8,621 | $ | (8,385 | ) | $ | 3,389,695 | |||||||
GSE MBS | 2,065,047 | 10,967 | (9,318 | ) | 2,066,696 | |||||||||||
Total HTM securities | $ | 5,454,506 | $ | 19,588 | $ | (17,703 | ) | $ | 5,456,391 | |||||||
December 31, 2018 | ||||||||||||||||
MBS: | ||||||||||||||||
Other U.S. obligations - guaranteed MBS | $ | 3,468,882 | $ | 11,034 | $ | (1,552 | ) | $ | 3,478,364 | |||||||
GSE MBS | 2,204,838 | 7,673 | (14,730 | ) | 2,197,781 | |||||||||||
Total HTM securities | $ | 5,673,720 | $ | 18,707 | $ | (16,282 | ) | $ | 5,676,145 |
(1) | Carrying value equals amortized cost. Includes adjustments made to the cost basis of an investment for accretion, amortization and collection of principal. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Unrealized Loss Positions. The following table presents impaired HTM securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
Less than 12 months | 12 months or More | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
March 31, 2019 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
MBS: | ||||||||||||||||||||||||
Other U.S. obligations - guaranteed MBS | $ | 1,219,856 | $ | (6,365 | ) | $ | 560,179 | $ | (2,020 | ) | $ | 1,780,035 | $ | (8,385 | ) | |||||||||
GSE MBS | 229,530 | (209 | ) | 775,328 | (9,109 | ) | 1,004,858 | (9,318 | ) | |||||||||||||||
Total impaired HTM securities | $ | 1,449,386 | $ | (6,574 | ) | $ | 1,335,507 | $ | (11,129 | ) | $ | 2,784,893 | $ | (17,703 | ) | |||||||||
December 31, 2018 | ||||||||||||||||||||||||
MBS: | ||||||||||||||||||||||||
Other U.S. obligations - guaranteed MBS | $ | 829,121 | $ | (873 | ) | $ | 417,952 | $ | (679 | ) | $ | 1,247,073 | $ | (1,552 | ) | |||||||||
GSE MBS | 435,756 | (890 | ) | 716,647 | (13,840 | ) | 1,152,403 | (14,730 | ) | |||||||||||||||
Total impaired HTM securities | $ | 1,264,877 | $ | (1,763 | ) | $ | 1,134,599 | $ | (14,519 | ) | $ | 2,399,476 | $ | (16,282 | ) |
Other-Than-Temporary Impairment.
Evaluation Process and Results - AFS and HTM Securities.
Other U.S. and GSE Obligations and TVA Debentures. For other U.S. obligations, GSE obligations, and TVA debentures, we determined that, based on current expectations, the strength of the issuers' guarantees through direct obligations of or support from the United States government is sufficient to protect us from any losses. As a result, all of the gross unrealized losses as of March 31, 2019 are considered temporary.
Note 4 - Advances
The following table presents advances outstanding by redemption term.
March 31, 2019 | December 31, 2018 | |||||||||||||
Redemption Term | Amount | WAIR % | Amount | WAIR % | ||||||||||
Overdrawn demand and overnight deposit accounts | $ | 3,683 | 2.50 | $ | — | — | ||||||||
Due in 1 year or less | 14,861,003 | 2.52 | 15,595,985 | 2.47 | ||||||||||
Due after 1 year through 2 years | 2,961,722 | 2.29 | 2,957,861 | 2.19 | ||||||||||
Due after 2 years through 3 years | 2,063,334 | 2.45 | 2,444,486 | 2.46 | ||||||||||
Due after 3 years through 4 years | 2,474,991 | 2.50 | 2,139,695 | 2.36 | ||||||||||
Due after 4 years through 5 years | 2,478,616 | 2.57 | 1,977,925 | 2.76 | ||||||||||
Thereafter | 7,990,067 | 2.48 | 7,713,409 | 2.41 | ||||||||||
Total advances, par value | 32,833,416 | 2.49 | 32,829,361 | 2.44 | ||||||||||
Fair-value hedging adjustments | (6,733 | ) | (106,499 | ) | ||||||||||
Unamortized swap termination fees associated with modified advances, net of deferred prepayment fees | 3,401 | 4,806 | ||||||||||||
Total advances | $ | 32,830,084 | $ | 32,727,668 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents advances outstanding by the earlier of the redemption date or the next call date and next put date.
Earlier of Redemption or Next Call Date | Earlier of Redemption or Next Put Date | |||||||||||||||
March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | |||||||||||||
Overdrawn demand and overnight deposit accounts | $ | 3,683 | $ | — | $ | 3,683 | $ | — | ||||||||
Due in 1 year or less | 21,481,614 | 22,574,897 | 15,603,103 | 15,595,985 | ||||||||||||
Due after 1 year through 2 years | 2,203,573 | 2,061,411 | 3,761,222 | 3,682,461 | ||||||||||||
Due after 2 years through 3 years | 1,320,034 | 1,356,186 | 3,044,234 | 3,660,486 | ||||||||||||
Due after 3 years through 4 years | 1,716,401 | 1,581,905 | 3,156,216 | 2,547,995 | ||||||||||||
Due after 4 years through 5 years | 1,981,516 | 1,425,525 | 2,359,396 | 2,633,030 | ||||||||||||
Thereafter | 4,126,595 | 3,829,437 | 4,905,562 | 4,709,404 | ||||||||||||
Total advances, par value | $ | 32,833,416 | $ | 32,829,361 | $ | 32,833,416 | $ | 32,829,361 |
Credit Risk Exposure and Security Terms. At both March 31, 2019 and December 31, 2018, our top five borrowers held 40% of total advances outstanding, at par. As security for the advances to these and our other borrowers, we held, or had access to, collateral with an estimated fair value at March 31, 2019 and December 31, 2018 that was well in excess of the advances outstanding on those dates, respectively. For information related to our credit risk on advances and allowance methodology for credit losses, see Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.
Note 5 - Mortgage Loans Held for Portfolio
The following tables present information on mortgage loans held for portfolio by term, type and product.
Term | March 31, 2019 | December 31, 2018 | ||||||
Fixed-rate long-term mortgages | $ | 10,185,796 | $ | 10,145,476 | ||||
Fixed-rate medium-term (1) mortgages | 965,206 | 992,059 | ||||||
Total mortgage loans held for portfolio, UPB | 11,151,002 | 11,137,535 | ||||||
Unamortized premiums | 251,230 | 251,778 | ||||||
Unamortized discounts | (2,382 | ) | (2,415 | ) | ||||
Fair-value hedging adjustments | (764 | ) | (1,320 | ) | ||||
Allowance for loan losses | (600 | ) | (600 | ) | ||||
Total mortgage loans held for portfolio, net | $ | 11,398,486 | $ | 11,384,978 |
(1) | Defined as a term of 15 years or less at origination. |
Type | March 31, 2019 | December 31, 2018 | ||||||
Conventional | $ | 10,793,311 | $ | 10,769,980 | ||||
Government-guaranteed or -insured | 357,691 | 367,555 | ||||||
Total mortgage loans held for portfolio, UPB | $ | 11,151,002 | $ | 11,137,535 |
Product | March 31, 2019 | December 31, 2018 | ||||||
MPP | $ | 10,896,089 | $ | 10,875,079 | ||||
MPF Program | 254,913 | 262,456 | ||||||
Total mortgage loans held for portfolio, UPB | $ | 11,151,002 | $ | 11,137,535 |
For information related to our credit risk on mortgage loans and allowance methodology for loan losses, see Note 6 - Allowance for Credit Losses.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 6 - Allowance for Credit Losses
A description of the allowance methodologies for our portfolio segments as well as our policy for impairing financing receivables and charging them off when necessary is disclosed in Note 1 - Summary of Significant Accounting Policies and Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.
Conventional Mortgage Loans.
Conventional MPP. The following table presents the activity in the LRA, which is reported in other liabilities.
Three Months Ended March 31, | ||||||||
LRA Activity | 2019 | 2018 | ||||||
Liability, beginning of period | $ | 174,096 | $ | 148,715 | ||||
Additions | 3,070 | 5,146 | ||||||
Claims paid | (87 | ) | (170 | ) | ||||
Distributions to PFIs | (442 | ) | (417 | ) | ||||
Liability, end of period | $ | 176,637 | $ | 153,274 |
Credit Quality Indicators. The tables below present the key credit quality indicators for our mortgage loans held for portfolio.
Delinquency Status as of March 31, 2019 | Conventional | Government | Total | |||||||||
Past due: | ||||||||||||
30-59 days | $ | 50,134 | $ | 8,993 | $ | 59,127 | ||||||
60-89 days | 6,542 | 2,008 | 8,550 | |||||||||
90 days or more | 13,089 | 2,273 | 15,362 | |||||||||
Total past due | 69,765 | 13,274 | 83,039 | |||||||||
Total current | 11,017,338 | 350,359 | 11,367,697 | |||||||||
Total mortgage loans, recorded investment (1) | $ | 11,087,103 | $ | 363,633 | $ | 11,450,736 | ||||||
Delinquency Status as of December 31, 2018 | ||||||||||||
Past due: | ||||||||||||
30-59 days | $ | 36,594 | $ | 9,352 | $ | 45,946 | ||||||
60-89 days | 7,904 | 2,870 | 10,774 | |||||||||
90 days or more | 13,764 | 1,697 | 15,461 | |||||||||
Total past due | 58,262 | 13,919 | 72,181 | |||||||||
Total current | 11,003,243 | 359,758 | 11,363,001 | |||||||||
Total mortgage loans, recorded investment (1) | $ | 11,061,505 | $ | 373,677 | $ | 11,435,182 |
Other Delinquency Statistics as of March 31, 2019 | Conventional | Government | Total | |||||||||
In process of foreclosure (2) | $ | 5,833 | $ | — | $ | 5,833 | ||||||
Serious delinquency rate (3) | 0.12 | % | 0.62 | % | 0.13 | % | ||||||
Past due 90 days or more still accruing interest (4) | $ | 12,203 | $ | 2,273 | $ | 14,476 | ||||||
On non-accrual status | $ | 1,630 | $ | — | $ | 1,630 | ||||||
Other Delinquency Statistics as of December 31, 2018 | ||||||||||||
In process of foreclosure (2) | $ | 6,836 | $ | — | $ | 6,836 | ||||||
Serious delinquency rate (3) | 0.12 | % | 0.45 | % | 0.14 | % | ||||||
Past due 90 days or more still accruing interest (4) | $ | 12,849 | $ | 1,697 | $ | 14,546 | ||||||
On non-accrual status | $ | 1,762 | $ | — | $ | 1,762 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
(1) | The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net of any deferred loan fees or costs, unamortized premiums or discounts (which may include the basis adjustment related to any gain or loss on a delivery commitment prior to being funded) and direct charge-offs. The recorded investment is not net of any valuation allowance. |
(2) | Includes loans for which the decision of foreclosure or similar alternative, such as pursuit of deed-in-lieu of foreclosure, has been reported. Loans in process of foreclosure are included in past due categories depending on their delinquency status, but are not necessarily considered to be on non-accrual status. |
(3) | Represents loans 90 days or more past due (including loans in process of foreclosure) expressed as a percentage of the total recorded investment in mortgage loans. The percentage excludes principal and interest amounts previously paid in full by the servicers on conventional loans that are pending resolution of potential loss claims. Our servicers repurchase seriously delinquent government loans, including FHA loans, when certain criteria are met. |
(4) | Although our past due scheduled/scheduled MPP loans are classified as loans past due 90 days or more based on the loan's delinquency status, we do not consider these loans to be on non-accrual status. |
Allowance for Loan Losses on Mortgage Loans. The following table presents the components of the allowance for loan losses, including the credit enhancement waterfall for MPP.
Components of Allowance | March 31, 2019 | December 31, 2018 | ||||||
MPP estimated incurred losses remaining after borrower's equity, before credit enhancements (1) | $ | 3,647 | $ | 3,505 | ||||
Portion of estimated incurred losses recoverable from credit enhancements: | ||||||||
PMI | (671 | ) | (627 | ) | ||||
LRA (2) | (1,230 | ) | (1,137 | ) | ||||
SMI | (1,261 | ) | (1,256 | ) | ||||
Total portion recoverable from credit enhancements | (3,162 | ) | (3,020 | ) | ||||
Allowance for unrecoverable PMI/SMI | 15 | 15 | ||||||
Allowance for MPP loan losses | 500 | 500 | ||||||
Allowance for MPF Program loan losses | 100 | 100 | ||||||
Allowance for loan losses | $ | 600 | $ | 600 |
(1) | Based on a loss emergence period of 24 months. |
(2) | Amounts recoverable are limited to (i) the estimated losses remaining after borrower's equity and PMI and (ii) the remaining balance in each pool's portion of the LRA. The remainder of the total LRA balance is available to cover any losses not yet incurred and to distribute any excess funds to the PFIs. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The tables below present a rollforward of our allowance for loan losses, the allowance for loan losses by impairment methodology, and the recorded investment in mortgage loans by impairment methodology.
Three Months Ended March 31, | ||||||||
Rollforward of Allowance for Loan Losses | 2019 | 2018 | ||||||
Balance, beginning of period | $ | 600 | $ | 850 | ||||
Charge-offs | (54 | ) | (150 | ) | ||||
Recoveries | — | 254 | ||||||
Provision for (reversal of) loan losses | 54 | (104 | ) | |||||
Balance, end of period | $ | 600 | $ | 850 |
Allowance for Loan Losses by Impairment Methodology | March 31, 2019 | December 31, 2018 | ||||||
Conventional loans collectively evaluated for impairment | $ | 529 | $ | 563 | ||||
Conventional loans individually evaluated for impairment (1) | 71 | 37 | ||||||
Total allowance for loan losses | $ | 600 | $ | 600 | ||||
Recorded Investment by Impairment Methodology | March 31, 2019 | December 31, 2018 | ||||||
Conventional loans collectively evaluated for impairment | $ | 11,073,598 | $ | 11,048,075 | ||||
Conventional loans individually evaluated for impairment (1) | 13,505 | 13,430 | ||||||
Total recorded investment in conventional loans | $ | 11,087,103 | $ | 11,061,505 |
(1) | The recorded investment in our MPP conventional loans individually evaluated for impairment excludes principal previously paid in full by the servicers as of March 31, 2019 and December 31, 2018 of $1,687 and $1,552, respectively, that remains subject to potential claims by those servicers for any losses resulting from past or future liquidations of the underlying properties. However, the MPP allowance for loan losses as of March 31, 2019 and December 31, 2018 includes $17 and $16, respectively, for these potential claims. |
Note 7 - Derivatives and Hedging Activities
Managing Credit Risk on Derivatives. We are subject to credit risk due to the risk of nonperformance by the counterparties to our derivative transactions.
Uncleared Derivatives. For certain of our uncleared derivatives, we have credit support agreements that contain provisions requiring us to post additional collateral with our counterparties if there is deterioration in our credit rating. If our credit rating is lowered by an NRSRO, we could be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate estimated fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest on cash collateral) at March 31, 2019 was $93, for which we were not required to post collateral. If our credit rating had been lowered by an NRSRO (from an S&P equivalent of AA+ to AA), we would not have been required to deliver additional collateral to our uncleared derivative counterparties at March 31, 2019.
Cleared Derivatives. The clearinghouse determines margin requirements which are generally not based on credit ratings. However, clearing agents may require additional margin to be posted by us based on credit considerations, including but not limited to any credit rating downgrades. At March 31, 2019, we were not required by our clearing agents to post any additional margin.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Financial Statement Effect and Additional Financial Information.
Derivative Notional Amounts. We record derivative instruments, related cash collateral received or pledged/posted and associated accrued interest on a net basis, by clearing agent and/or by counterparty when the netting requirements have been met. The following table presents the notional amount and estimated fair value of derivative assets and liabilities.
Estimated Fair Value | Estimated Fair Value | |||||||||||
Notional | of Derivative | of Derivative | ||||||||||
March 31, 2019 | Amount | Assets | Liabilities | |||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest-rate swaps | $ | 36,201,215 | $ | 118,458 | $ | 141,830 | ||||||
Total derivatives designated as hedging instruments | 36,201,215 | 118,458 | 141,830 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest-rate swaps | 1,976,930 | 1,001 | 104 | |||||||||
Swaptions | 1,000,000 | 1 | — | |||||||||
Interest-rate caps/floors | 679,500 | 444 | — | |||||||||
Interest-rate forwards | 51,800 | — | 521 | |||||||||
MDCs | 49,856 | 171 | 15 | |||||||||
Total derivatives not designated as hedging instruments | 3,758,086 | 1,617 | 640 | |||||||||
Total derivatives before adjustments | $ | 39,959,301 | 120,075 | 142,470 | ||||||||
Netting adjustments and cash collateral (1) | 55,612 | (141,082 | ) | |||||||||
Total derivatives, net | $ | 175,687 | $ | 1,388 | ||||||||
December 31, 2018 | ||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest-rate swaps | $ | 35,135,617 | $ | 174,990 | $ | 123,331 | ||||||
Total derivatives designated as hedging instruments | 35,135,617 | 174,990 | 123,331 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest-rate swaps | 965,930 | 562 | 106 | |||||||||
Swaptions | 950,000 | 105 | — | |||||||||
Interest-rate caps/floors | 679,500 | 999 | — | |||||||||
Interest-rate forwards | 44,100 | — | 202 | |||||||||
MDCs | 43,753 | 146 | 23 | |||||||||
Total derivatives not designated as hedging instruments | 2,683,283 | 1,812 | 331 | |||||||||
Total derivatives before adjustments | $ | 37,818,900 | 176,802 | 123,662 | ||||||||
Netting adjustments and cash collateral (1) | (60,038 | ) | (102,595 | ) | ||||||||
Total derivatives, net | $ | 116,764 | $ | 21,067 |
(1) | Represents the application of the netting requirements that allow us to settle (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty. Cash collateral pledged to counterparties at March 31, 2019 and December 31, 2018, including accrued interest, totaled $198,754 and $127,952, respectively. Cash collateral received from counterparties and held at March 31, 2019 and December 31, 2018, including accrued interest, totaled $2,060 and $85,395, respectively. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents separately the estimated fair value of derivative instruments meeting and not meeting netting requirements, including the effect of the related collateral held or pledged.
March 31, 2019 | December 31, 2018 | |||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||
Derivative instruments meeting netting requirements: | ||||||||||||||||
Gross recognized amount | ||||||||||||||||
Uncleared | $ | 102,753 | $ | 140,000 | $ | 174,725 | $ | 106,333 | ||||||||
Cleared | 17,151 | 1,934 | 1,931 | 17,104 | ||||||||||||
Total gross recognized amount | 119,904 | 141,934 | 176,656 | 123,437 | ||||||||||||
Gross amounts of netting adjustments and cash collateral | ||||||||||||||||
Uncleared | (81,380 | ) | (139,148 | ) | (168,426 | ) | (85,491 | ) | ||||||||
Cleared | 136,992 | (1,934 | ) | 108,388 | (17,104 | ) | ||||||||||
Total gross amounts of netting adjustments and cash collateral | 55,612 | (141,082 | ) | (60,038 | ) | (102,595 | ) | |||||||||
Net amounts after netting adjustments and cash collateral | ||||||||||||||||
Uncleared | 21,373 | 852 | 6,299 | 20,842 | ||||||||||||
Cleared | 154,143 | — | 110,319 | — | ||||||||||||
Total net amounts after netting adjustments and cash collateral | 175,516 | 852 | 116,618 | 20,842 | ||||||||||||
Derivative instruments not meeting netting requirements (1) | 171 | 536 | 146 | 225 | ||||||||||||
Total derivatives, at estimated fair value | $ | 175,687 | $ | 1,388 | $ | 116,764 | $ | 21,067 |
(1) | Includes MDCs and certain interest-rate forwards. |
The following table presents the components of net gains (losses) on derivatives and hedging activities reported in other income.
Three Months Ended March 31, | ||||||||
Type of Hedge | 2019 | 2018 | ||||||
Net gain (loss) related to fair-value hedge ineffectiveness: | ||||||||
Interest-rate swaps | $ | — | $ | 7,324 | ||||
Total net gain (loss) related to fair-value hedge ineffectiveness | — | 7,324 | ||||||
Net gain (loss) on derivatives not designated as hedging instruments: | ||||||||
Economic hedges: | ||||||||
Interest-rate swaps | 493 | 172 | ||||||
Swaptions | (172 | ) | (58 | ) | ||||
Interest-rate caps/floors | (555 | ) | 48 | |||||
Interest-rate forwards | (639 | ) | 1,248 | |||||
Net interest settlements | (3,117 | ) | (638 | ) | ||||
MDCs | 568 | (1,370 | ) | |||||
Total net gain (loss) on derivatives not designated as hedging instruments | (3,422 | ) | (598 | ) | ||||
Price alignment interest (1) | — | (794 | ) | |||||
Net gains (losses) on derivatives and hedging activities in other income | $ | (3,422 | ) | $ | 5,932 |
(1) | Relates to derivatives for which variation margin payments are characterized as daily settled contracts. For 2019, the portion related to derivatives not designated as hedging instruments is allocated to the applicable type of derivative. |
Beginning January 1, 2019, changes in the estimated fair value of the derivative hedging instrument and the associated hedged item attributable to the hedged risk for qualifying fair-value hedging relationships are prospectively included in the same line in the statement of income as the earnings effect of the hedged item. As a result, such changes in fair value are recorded in net interest income instead of other income for the three months ended March 31, 2019. Prior period amounts presented have not been reclassified. See Note 2 - Recently Adopted Accounting Guidance for more details.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents, by type of hedged item, the net gains (losses) on derivatives and the related hedged items in qualifying fair-value hedging relationships and the impact on net interest income.
Three Months Ended March 31, 2019 | Advances | Investments | CO Bonds | Total | ||||||||||||
Changes in fair value: | ||||||||||||||||
Hedged items | $ | 100,190 | $ | 137,793 | $ | (44,572 | ) | $ | 193,411 | |||||||
Derivatives | (104,842 | ) | (149,036 | ) | 46,591 | (207,287 | ) | |||||||||
Net changes in fair value before price alignment interest | (4,652 | ) | (11,243 | ) | 2,019 | (13,876 | ) | |||||||||
Price alignment interest (1) | (250 | ) | (920 | ) | 53 | (1,117 | ) | |||||||||
Net interest settlements on derivatives (2) (3) | 23,232 | 13,483 | (18,952 | ) | 17,763 | |||||||||||
Amortization/accretion of active hedging relationships | — | 80 | 70 | 150 | ||||||||||||
Net gains (losses) on qualifying fair-value hedging relationships | 18,330 | 1,400 | (16,810 | ) | 2,920 | |||||||||||
Amortization/accretion of discontinued fair-value hedging relationships | (7 | ) | — | (3,470 | ) | (3,477 | ) | |||||||||
Net gains (losses) on derivatives and hedging activities in net interest income (3) | $ | 18,323 | $ | 1,400 | $ | (20,280 | ) | $ | (557 | ) |
Three Months Ended March 31, 2018 | Advances | Investments | CO Bonds | Total | ||||||||||||
Changes in fair value: | ||||||||||||||||
Hedged items | $ | (100,748 | ) | $ | (150,582 | ) | $ | 85,234 | $ | (166,096 | ) | |||||
Derivatives | 103,608 | 154,327 | (84,515 | ) | 173,420 | |||||||||||
Net changes in fair value | 2,860 | 3,745 | 719 | 7,324 | ||||||||||||
Net interest settlements on derivatives (2) (3) | 1,339 | (3,310 | ) | 1,264 | (707 | ) | ||||||||||
Amortization/accretion of active hedging relationships | — | 86 | 89 | 175 | ||||||||||||
Net gains (losses) on qualifying fair-value hedging relationships | 4,199 | 521 | 2,072 | 6,792 | ||||||||||||
Add: amortization/accretion of discontinued fair-value hedging relationships | (12 | ) | — | (701 | ) | (713 | ) | |||||||||
Less: net changes in fair value (4) | (2,860 | ) | (3,745 | ) | (719 | ) | (7,324 | ) | ||||||||
Net gains (losses) on derivatives and hedging activities in net interest income (3) | $ | 1,327 | $ | (3,224 | ) | $ | 652 | $ | (1,245 | ) |
(1) | Relates to derivatives for which variation margin payments are characterized as daily settled contracts. |
(2) | Represents interest income/expense on derivatives in qualifying fair-value hedging relationships. Net interest settlements on derivatives that are not in qualifying fair-value hedging relationships are reported in other income. |
(3) | Excludes the interest income/expense of the respective hedged items. |
(4) | Included in other income. |
The following table presents the amortized cost, and the related cumulative basis adjustments, on hedged items in qualifying fair-value hedging relationships.
March 31, 2019 | Advances | Investments | CO Bonds | Total | ||||||||||||
Amortized cost of hedged items (1) | $ | 14,825,791 | $ | 8,328,500 | $ | 13,429,451 | $ | 36,583,742 | ||||||||
Cumulative basis adjustments included in amortized cost: | ||||||||||||||||
For active fair-value hedging relationships | $ | (6,733 | ) | $ | (97,656 | ) | $ | 54,616 | $ | (49,773 | ) | |||||
For discontinued fair-value hedging relationships | — | — | 142 | 142 | ||||||||||||
Total cumulative fair-value hedging basis adjustments on hedged items (2) | $ | (6,733 | ) | $ | (97,656 | ) | $ | 54,758 | $ | (49,631 | ) |
(1) | Includes only the portion of the amortized cost of the hedged items in qualifying fair-value hedging relationships. |
(2) | Excludes any offsetting effect of the net fair value of the associated derivatives. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 8 - Consolidated Obligations
In addition to being the primary obligor for all consolidated obligations issued on our behalf, we are jointly and severally liable with each of the other FHLBanks for the payment of the principal and interest on all FHLBank outstanding consolidated obligations. The par values of the FHLBanks' outstanding consolidated obligations was $1.0 trillion at both March 31, 2019 and December 31, 2018. As provided by the Bank Act and Finance Agency regulations, consolidated obligations are backed only by the financial resources of all FHLBanks.
Discount Notes. The following table presents our discount notes outstanding, all of which are due within one year of issuance.
Discount Notes | March 31, 2019 | December 31, 2018 | ||||||
Book value | $ | 21,254,090 | $ | 20,895,262 | ||||
Par value | $ | 21,320,545 | $ | 20,952,650 | ||||
Weighted average effective interest rate | 2.43 | % | 2.34 | % |
CO Bonds. The following table presents our CO bonds outstanding by contractual maturity.
March 31, 2019 | December 31, 2018 | |||||||||||||
Year of Contractual Maturity | Amount | WAIR% | Amount | WAIR% | ||||||||||
Due in 1 year or less | $ | 19,752,490 | 2.27 | $ | 18,456,870 | 2.07 | ||||||||
Due after 1 year through 2 years | 7,716,745 | 2.28 | 8,823,285 | 2.30 | ||||||||||
Due after 2 years through 3 years | 2,363,370 | 2.48 | 2,640,620 | 2.42 | ||||||||||
Due after 3 years through 4 years | 3,078,650 | 2.35 | 3,024,000 | 2.33 | ||||||||||
Due after 4 years through 5 years | 1,092,625 | 2.73 | 998,375 | 2.54 | ||||||||||
Thereafter | 6,432,350 | 3.21 | 6,431,700 | 3.21 | ||||||||||
Total CO bonds, par value | 40,436,230 | 2.45 | 40,374,850 | 2.36 | ||||||||||
Unamortized premiums | 22,306 | 23,493 | ||||||||||||
Unamortized discounts | (14,818 | ) | (15,992 | ) | ||||||||||
Unamortized concessions | (13,435 | ) | (14,085 | ) | ||||||||||
Fair-value hedging adjustments | (54,758 | ) | (102,801 | ) | ||||||||||
Total CO bonds | $ | 40,375,525 | $ | 40,265,465 |
The following tables present our CO bonds outstanding by redemption feature and the earlier of the year of contractual maturity or next call date.
Redemption Feature | March 31, 2019 | December 31, 2018 | ||||||
Non-callable / non-putable | $ | 26,394,230 | $ | 27,462,850 | ||||
Callable | 14,042,000 | 12,912,000 | ||||||
Total CO bonds, par value | $ | 40,436,230 | $ | 40,374,850 |
Year of Contractual Maturity or Next Call Date | March 31, 2019 | December 31, 2018 | ||||||
Due in 1 year or less | $ | 32,609,490 | $ | 30,331,870 | ||||
Due after 1 year through 2 years | 4,080,745 | 6,069,285 | ||||||
Due after 2 years through 3 years | 864,370 | 1,043,620 | ||||||
Due after 3 years through 4 years | 641,650 | 626,000 | ||||||
Due after 4 years through 5 years | 443,625 | 503,375 | ||||||
Thereafter | 1,796,350 | 1,800,700 | ||||||
Total CO bonds, par value | $ | 40,436,230 | $ | 40,374,850 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 9 - Affordable Housing Program
The following table summarizes the activity in our AHP funding obligation.
Three Months Ended March 31, | ||||||||
AHP Activity | 2019 | 2018 | ||||||
Liability at beginning of period | $ | 40,747 | $ | 32,166 | ||||
Assessment (expense) | 3,989 | 5,677 | ||||||
Subsidy usage, net (1) | (1,895 | ) | (2,757 | ) | ||||
Liability at end of period | $ | 42,841 | $ | 35,086 |
(1) | Subsidies disbursed are reported net of returns/recaptures of previously disbursed subsidies. |
Note 10 - Capital
Mandatorily Redeemable Capital Stock. The following table presents the activity in our MRCS.
Three Months Ended March 31, | ||||||||
MRCS Activity | 2019 | 2018 | ||||||
Liability at beginning of period | $ | 168,876 | $ | 164,322 | ||||
Reclassification from capital stock | 2,109 | — | ||||||
Proceeds from issuance (1) | 3,704 | — | ||||||
Redemptions/repurchases | (487 | ) | (540 | ) | ||||
Liability at end of period | $ | 174,202 | $ | 163,782 |
(1) | Represents a purchase of capital stock by a captive insurance company member, which is considered mandatorily redeemable as a result of the Final Membership Rule. |
The following table presents MRCS by contractual year of redemption. The year of redemption is the later of (i) the final year of the five-year redemption period, or (ii) the first year in which a non-member no longer has an activity-based stock requirement.
MRCS Contractual Year of Redemption | March 31, 2019 | December 31, 2018 | ||||||
Year 1 (1) | $ | 828 | $ | 1,316 | ||||
Year 2 | — | — | ||||||
Year 3 | 8,649 | 8,649 | ||||||
Year 4 | — | — | ||||||
Year 5 | 28,833 | 26,723 | ||||||
Thereafter (2) | 135,892 | 132,188 | ||||||
Total MRCS | $ | 174,202 | $ | 168,876 |
(1) | Balances at March 31, 2019 and December 31, 2018 include $815 and $1,304, respectively, of Class B stock that had reached the end of the five-year redemption period but will not be redeemed until the associated credit products and other obligations are no longer outstanding. |
(2) | Represents the five-year redemption period of Class B stock held by certain captive insurance companies which begins immediately upon their respective terminations of membership no later than February 19, 2021, in accordance with the Final Membership Rule. However, upon their respective terminations, we currently intend to repurchase their excess stock (if any) in accordance with our capital plan, the balances of which at March 31, 2019 and December 31, 2018 totaled $61,642 and $57,938, respectively. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents the distributions related to MRCS.
Three Months Ended March 31, | ||||||||
MRCS Distributions | 2019 | 2018 | ||||||
Recorded as interest expense | $ | 2,718 | $ | 2,745 | ||||
Recorded as distributions from retained earnings | — | — | ||||||
Total | $ | 2,718 | $ | 2,745 |
Capital Requirements. We are subject to three capital requirements under our capital plan and Finance Agency regulations as disclosed in Note 13 - Capital in our 2018 Form 10-K. As presented in the following table, we were in compliance with those requirements at March 31, 2019 and December 31, 2018.
March 31, 2019 | December 31, 2018 | |||||||||||||||
Regulatory Capital Requirements | Required | Actual | Required | Actual | ||||||||||||
Risk-based capital | $ | 806,270 | $ | 3,243,982 | $ | 786,925 | $ | 3,177,638 | ||||||||
Total regulatory capital | $ | 2,655,311 | $ | 3,243,982 | $ | 2,616,468 | $ | 3,177,638 | ||||||||
Total regulatory capital-to-asset ratio | 4.00 | % | 4.89 | % | 4.00 | % | 4.86 | % | ||||||||
Leverage capital | $ | 3,319,138 | $ | 4,865,973 | $ | 3,270,585 | $ | 4,766,457 | ||||||||
Leverage ratio | 5.00 | % | 7.33 | % | 5.00 | % | 7.29 | % |
Note 11 - Accumulated Other Comprehensive Income
The following table presents a summary of the changes in the components of AOCI.
AOCI Rollforward | Unrealized Gains (Losses) on AFS Securities | Non-Credit OTTI on AFS Securities | Non-Credit OTTI on HTM Securities | Pension Benefits | Total AOCI | |||||||||||||||
Balance, December 31, 2017 | $ | 92,519 | $ | 29,322 | $ | (51 | ) | $ | (10,384 | ) | $ | 111,406 | ||||||||
OCI before reclassifications: | ||||||||||||||||||||
Net change in unrealized gains (losses) | 22,553 | 3 | — | — | 22,556 | |||||||||||||||
Net change in fair value | — | 28 | — | — | 28 | |||||||||||||||
Accretion of non-credit losses | — | — | (2 | ) | — | (2 | ) | |||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||
Pension benefits, net | — | — | — | 323 | 323 | |||||||||||||||
Total other comprehensive income (loss) | 22,553 | 31 | (2 | ) | 323 | 22,905 | ||||||||||||||
Balance, March 31, 2018 | $ | 115,072 | $ | 29,353 | $ | (53 | ) | $ | (10,061 | ) | $ | 134,311 | ||||||||
Balance, December 31, 2018 | $ | 52,986 | $ | — | $ | — | $ | (11,299 | ) | $ | 41,687 | |||||||||
OCI before reclassifications: | ||||||||||||||||||||
Net change in unrealized gains (losses) | 26,905 | — | — | — | 26,905 | |||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||
Pension benefits, net | — | — | — | 347 | 347 | |||||||||||||||
Total other comprehensive income (loss) | 26,905 | — | — | 347 | 27,252 | |||||||||||||||
Balance, March 31, 2019 | $ | 79,891 | $ | — | $ | — | $ | (10,952 | ) | $ | 68,939 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 12 - Segment Information
The following table presents our financial performance by operating segment.
Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |||||||||||||||||||||||
Traditional | Mortgage Loans | Total | Traditional | Mortgage Loans | Total | |||||||||||||||||||
Net interest income | $ | 39,227 | $ | 18,312 | $ | 57,539 | $ | 52,324 | $ | 17,807 | $ | 70,131 | ||||||||||||
Provision for (reversal of) credit losses | — | 54 | 54 | — | (104 | ) | (104 | ) | ||||||||||||||||
Other income (loss) | 3,185 | (169 | ) | 3,016 | 6,342 | (155 | ) | 6,187 | ||||||||||||||||
Other expenses | 19,976 | 3,351 | 23,327 | 18,816 | 3,581 | 22,397 | ||||||||||||||||||
Income before assessments | 22,436 | 14,738 | 37,174 | 39,850 | 14,175 | 54,025 | ||||||||||||||||||
Affordable Housing Program assessments | 2,515 | 1,474 | 3,989 | 4,259 | 1,418 | 5,677 | ||||||||||||||||||
Net income | $ | 19,921 | $ | 13,264 | $ | 33,185 | $ | 35,591 | $ | 12,757 | $ | 48,348 |
The following table presents asset balances by operating segment.
By Date | Traditional | Mortgage Loans | Total | |||||||||
March 31, 2019 | $ | 54,984,281 | $ | 11,398,486 | $ | 66,382,767 | ||||||
December 31, 2018 | 54,026,721 | 11,384,978 | 65,411,699 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 13 - Estimated Fair Values
The following tables present the carrying value and estimated fair value of each of our financial instruments. The total of the estimated fair values does not represent an estimate of our overall market value as a going concern, which would take into account, among other considerations, future business opportunities and the net profitability of assets and liabilities.
March 31, 2019 | ||||||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||||||
Carrying | Netting | |||||||||||||||||||||||
Financial Instruments | Value | Total | Level 1 | Level 2 | Level 3 | Adjustments (1) | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 73,099 | $ | 73,099 | $ | 73,099 | $ | — | $ | — | $ | — | ||||||||||||
Interest-bearing deposits | 316,530 | 316,530 | 316,000 | 530 | — | — | ||||||||||||||||||
Securities purchased under agreements to resell | 3,297,519 | 3,297,525 | — | 3,297,525 | — | — | ||||||||||||||||||
Federal funds sold | 3,100,000 | 3,100,000 | — | 3,100,000 | — | — | ||||||||||||||||||
Trading securities | 1,121,889 | 1,121,889 | — | 1,121,889 | — | — | ||||||||||||||||||
AFS securities | 8,408,391 | 8,408,391 | — | 8,408,391 | — | — | ||||||||||||||||||
HTM securities | 5,454,506 | 5,456,391 | — | 5,456,391 | — | — | ||||||||||||||||||
Advances | 32,830,084 | 32,800,748 | — | 32,800,748 | — | — | ||||||||||||||||||
Mortgage loans held for portfolio, net | 11,398,486 | 11,381,234 | — | 11,371,641 | 9,593 | — | ||||||||||||||||||
Accrued interest receivable | 132,955 | 132,955 | — | 132,955 | — | — | ||||||||||||||||||
Derivative assets, net | 175,687 | 175,687 | — | 120,075 | — | 55,612 | ||||||||||||||||||
Grantor trust assets (2) | 23,251 | 23,251 | 23,251 | — | — | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | 698,727 | 698,727 | — | 698,727 | — | — | ||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||
Discount notes | 21,254,090 | 21,254,396 | — | 21,254,396 | — | — | ||||||||||||||||||
Bonds | 40,375,525 | 40,452,170 | — | 40,452,170 | — | — | ||||||||||||||||||
Accrued interest payable | 179,334 | 179,334 | — | 179,334 | — | — | ||||||||||||||||||
Derivative liabilities, net | 1,388 | 1,388 | — | 142,470 | — | (141,082 | ) | |||||||||||||||||
MRCS | 174,202 | 174,202 | 174,202 | — | — | — |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
December 31, 2018 | ||||||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||||||
Carrying | Netting | |||||||||||||||||||||||
Financial Instruments | Value | Total | Level 1 | Level 2 | Level 3 | Adjustments (1) | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 100,735 | $ | 100,735 | $ | 100,735 | $ | — | $ | — | $ | — | ||||||||||||
Interest-bearing deposits | 1,210,705 | 1,210,705 | 1,210,039 | 666 | — | — | ||||||||||||||||||
Securities purchased under agreements to resell | 3,212,726 | 3,212,728 | — | 3,212,728 | — | — | ||||||||||||||||||
Federal funds sold | 3,085,000 | 3,085,000 | — | 3,085,000 | — | — | ||||||||||||||||||
AFS securities | 7,703,596 | 7,703,596 | — | 7,703,596 | — | — | ||||||||||||||||||
HTM securities | 5,673,720 | 5,676,145 | — | 5,676,145 | — | — | ||||||||||||||||||
Advances | 32,727,668 | 32,669,145 | — | 32,669,145 | — | — | ||||||||||||||||||
Mortgage loans held for portfolio, net | 11,384,978 | 11,212,978 | — | 11,202,984 | 9,994 | — | ||||||||||||||||||
Accrued interest receivable | 124,611 | 124,611 | — | 124,611 | — | — | ||||||||||||||||||
Derivative assets, net | 116,764 | 116,764 | — | 176,802 | — | (60,038 | ) | |||||||||||||||||
Grantor trust assets (2) | 21,122 | 21,122 | 21,122 | — | — | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | 500,440 | 500,440 | — | 500,440 | — | — | ||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||
Discount notes | 20,895,262 | 20,895,446 | — | 20,895,446 | — | — | ||||||||||||||||||
Bonds | 40,265,465 | 40,137,791 | — | 40,137,791 | — | — | ||||||||||||||||||
Accrued interest payable | 179,728 | 179,728 | — | 179,728 | — | — | ||||||||||||||||||
Derivative liabilities, net | 21,067 | 21,067 | — | 123,662 | — | (102,595 | ) | |||||||||||||||||
MRCS | 168,876 | 168,876 | 168,876 | — | — | — |
(1) | Represents the application of the netting requirements that allow the settlement of (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty. |
(2) | Included in other assets on the statement of condition. |
Summary of Valuation Techniques and Significant Inputs. A description of the valuation techniques, significant inputs, and levels of fair value hierarchy is disclosed in Note 17 - Estimated Fair Values in our 2018 Form 10-K. No changes have been made in the current year.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Estimated Fair Value Measurements. The following tables present, by level within the fair value hierarchy, the estimated fair value of our financial assets and liabilities that are recorded at estimated fair value on a recurring or non-recurring basis on our statement of condition.
Netting | ||||||||||||||||||||
March 31, 2019 | Total | Level 1 | Level 2 | Level 3 | Adjustments (1) | |||||||||||||||
Trading securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 1,121,889 | $ | — | $ | 1,121,889 | $ | — | $ | — | ||||||||||
Total trading securities | 1,121,889 | — | 1,121,889 | — | — | |||||||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA debentures | 4,337,714 | — | 4,337,714 | — | — | |||||||||||||||
GSE MBS | 4,070,677 | — | 4,070,677 | — | — | |||||||||||||||
Total AFS securities | 8,408,391 | — | 8,408,391 | — | — | |||||||||||||||
Derivative assets: | ||||||||||||||||||||
Interest-rate related | 175,516 | — | 119,904 | — | 55,612 | |||||||||||||||
Interest-rate forwards | — | — | — | — | — | |||||||||||||||
MDCs | 171 | — | 171 | — | — | |||||||||||||||
Total derivative assets, net | 175,687 | — | 120,075 | — | 55,612 | |||||||||||||||
Grantor trust assets (2) | 23,251 | 23,251 | — | — | — | |||||||||||||||
Total assets at recurring estimated fair value | $ | 9,729,218 | $ | 23,251 | $ | 9,650,355 | $ | — | $ | 55,612 | ||||||||||
Derivative liabilities: | ||||||||||||||||||||
Interest-rate related | $ | 852 | $ | — | $ | 141,934 | $ | — | $ | (141,082 | ) | |||||||||
Interest-rate forwards | 521 | — | 521 | — | — | |||||||||||||||
MDCs | 15 | — | 15 | — | — | |||||||||||||||
Total derivative liabilities, net | 1,388 | — | 142,470 | — | (141,082 | ) | ||||||||||||||
Total liabilities at recurring estimated fair value | $ | 1,388 | $ | — | $ | 142,470 | $ | — | $ | (141,082 | ) | |||||||||
Mortgage loans held for portfolio (3) | $ | 1,775 | $ | — | $ | — | $ | 1,775 | $ | — | ||||||||||
Total assets at non-recurring estimated fair value | $ | 1,775 | $ | — | $ | — | $ | 1,775 | $ | — | ||||||||||
December 31, 2018 | ||||||||||||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA debentures | $ | 4,277,080 | $ | — | $ | 4,277,080 | $ | — | $ | — | ||||||||||
GSE MBS | 3,426,516 | — | 3,426,516 | — | — | |||||||||||||||
Total AFS securities | 7,703,596 | — | 7,703,596 | — | — | |||||||||||||||
Derivative assets: | ||||||||||||||||||||
Interest-rate related | 116,618 | — | 176,656 | — | (60,038 | ) | ||||||||||||||
MDCs | 146 | — | 146 | — | — | |||||||||||||||
Total derivative assets, net | 116,764 | — | 176,802 | — | (60,038 | ) | ||||||||||||||
Grantor trust assets (2) | 21,122 | 21,122 | — | — | — | |||||||||||||||
Total assets at recurring estimated fair value | $ | 7,841,482 | $ | 21,122 | $ | 7,880,398 | $ | — | $ | (60,038 | ) | |||||||||
Derivative liabilities: | ||||||||||||||||||||
Interest-rate related | $ | 20,842 | $ | — | $ | 123,437 | $ | — | $ | (102,595 | ) | |||||||||
Interest-rate forwards | 202 | — | 202 | — | — | |||||||||||||||
MDCs | 23 | — | 23 | — | — | |||||||||||||||
Total derivative liabilities, net | 21,067 | — | 123,662 | — | (102,595 | ) | ||||||||||||||
Total liabilities at recurring estimated fair value | $ | 21,067 | $ | — | $ | 123,662 | $ | — | $ | (102,595 | ) | |||||||||
Mortgage loans held for portfolio (4) | $ | 1,734 | $ | — | $ | — | $ | 1,734 | $ | — | ||||||||||
Total assets at non-recurring estimated fair value | $ | 1,734 | $ | — | $ | — | $ | 1,734 | $ | — |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
(1) | Represents the application of the netting requirements that allow us to settle (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed with the same clearing agent and/or counterparty. |
(2) | Included in other assets. |
(3) | Amounts are as of the date the fair value adjustment was recorded during the three months ended March 31, 2019. |
(4) | Amounts are as of the date the fair value adjustment was recorded during the year ended December 31, 2018. |
Note 14 - Commitments and Contingencies
The following table presents our off-balance-sheet commitments at their notional amounts.
March 31, 2019 | ||||||||||||
Type of Commitment | Expire within one year | Expire after one year | Total | |||||||||
Letters of credit outstanding | $ | 369,635 | $ | 95,055 | $ | 464,690 | ||||||
Unused lines of credit (1) | 950,619 | — | 950,619 | |||||||||
Commitments to fund additional advances (2) | 92,460 | — | 92,460 | |||||||||
Commitments to fund or purchase mortgage loans, net (3) | 49,856 | — | 49,856 | |||||||||
Unsettled CO bonds, at par | 358,000 | — | 358,000 | |||||||||
Unsettled discount notes, at par | 27,115 | — | 27,115 |
(1) | Maximum line of credit amount per member is $50,000. |
(2) | Generally for periods up to six months. |
(3) | Generally for periods up to 91 days. |
Pledged Collateral. At March 31, 2019 and December 31, 2018, we had pledged cash collateral, at par, of $198,746 and $127,942, respectively, to counterparties and clearing agents. At March 31, 2019 and December 31, 2018, we had not pledged any securities as collateral.
Legal Proceedings. We are subject to legal proceedings arising in the normal course of business. We record an accrual for a loss contingency when it is probable that a loss for which we could be liable has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these proceedings could have a material effect on our financial condition, results of operations or cash flows.
Additional discussion of other commitments and contingencies is provided in Note 4 - Advances; Note 5 - Mortgage Loans Held for Portfolio; Note 7 - Derivatives and Hedging Activities; Note 8 - Consolidated Obligations; Note 10 - Capital; and Note 13 - Estimated Fair Values.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 15 - Related Party and Other Transactions
Transactions with Related Parties. The following table presents the aggregate outstanding balances with directors' financial institutions and their balance as a percent of the total balance on our statement of condition.
March 31, 2019 | December 31, 2018 | |||||||||||||
Balances with Directors' Financial Institutions | Par value | % of Total | Par value | % of Total | ||||||||||
Capital stock | $ | 44,251 | 2 | % | $ | 43,315 | 2 | % | ||||||
Advances | 602,732 | 2 | % | 600,869 | 2 | % |
The par values at March 31, 2019 reflect changes in the composition of directors' financial institutions effective January 1, 2019, due to changes in board membership resulting from the 2018 director election.
The following table presents transactions with directors' financial institutions, taking into account the beginning and ending dates of the directors' terms, merger activity and other changes in the composition of directors' financial institutions.
Three Months Ended March 31, | ||||||||
Transactions with Directors' Financial Institutions | 2019 | 2018 | ||||||
Net capital stock issuances (redemptions and repurchases) | $ | 26 | $ | 846 | ||||
Net advances (repayments) | 38,239 | (97,300 | ) | |||||
Mortgage loan purchases | 4,594 | 6,355 |
Transactions with Other FHLBanks. Occasionally, we loan or borrow short-term funds to/from other FHLBanks. The following table presents the loans to other FHLBanks.
Three Months Ended March 31, | ||||||||
Loans to other FHLBanks | 2019 | 2018 | ||||||
Disbursements | $ | — | $ | (300,000 | ) | |||
Principal repayments | — | 300,000 |
There were no borrowings from other FHLBanks during the three months ended March 31, 2019 or 2018. There were no loans to or borrowings from other FHLBanks outstanding at March 31, 2019 or December 31, 2018.
GLOSSARY OF TERMS
ABS: Asset-Backed Securities
Advance: Secured loan to members, former members or Housing Associates
AFS: Available-for-Sale
Agency: GSE and Ginnie Mae
AHP: Affordable Housing Program
AMA: Acquired Member Assets
AOCI: Accumulated Other Comprehensive Income (Loss)
Bank Act: Federal Home Loan Bank Act of 1932, as amended
bps: basis points
CDFI: Community Development Financial Institution
CE: Credit Enhancement
CFI: Community Financial Institution, an FDIC-insured depository institution with average total assets below an annually-adjusted limit established by the Director based on the Consumer Price Index
CFPB: Bureau of Consumer Financial Protection
CFTC: United States Commodity Futures Trading Commission
Clearinghouse: A United States Commodity Futures Trading Commission-registered derivatives clearing organization
CME: CME Clearing
CMO: Collateralized Mortgage Obligation
CO bond: Consolidated Obligation bond
DB Plan: Pentegra Defined Benefit Pension Plan for Financial Institutions, as amended
DC Plan: Pentegra Defined Contribution Retirement Savings Plan for Financial Institutions, as amended
DDCP: Directors' Deferred Compensation Plan
Director: Director of the Federal Housing Finance Agency
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended
Exchange Act: Securities Exchange Act of 1934, as amended
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
FHLBank: A Federal Home Loan Bank
FHLBanks: The 11 Federal Home Loan Banks or a subset thereof
FHLBank System: The 11 Federal Home Loan Banks and the Office of Finance
FICO®: Fair Isaac Corporation, the creators of the FICO credit score
Final Membership Rule: Final Rule on FHLBank Membership issued by the Federal Housing Finance Agency effective February 19, 2016
Finance Agency: Federal Housing Finance Agency, successor to Finance Board
Finance Board: Federal Housing Finance Board, predecessor to Finance Agency
FLA: First Loss Account
FOMC: Federal Open Market Committee
Form 8-K: Current Report on Form 8-K as filed with the SEC under the Exchange Act
Form 10-K: Annual Report on Form 10-K as filed with the SEC under the Exchange Act
Form 10-Q: Quarterly Report on Form 10-Q as filed with the SEC under the Exchange Act
FRB: Federal Reserve Board
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: Generally Accepted Accounting Principles in the United States of America
Ginnie Mae: Government National Mortgage Association
GLB Act: Gramm-Leach-Bliley Act of 1999, as amended
GSE: United States Government-Sponsored Enterprise
HERA: Housing and Economic Recovery Act of 2008, as amended
Housing Associate: Approved lender under Title II of the National Housing Act of 1934 that is either a government agency or is chartered under federal or state law with rights and powers similar to those of a corporation
HTM: Held-to-Maturity
HUD: United States Department of Housing and Urban Development
JCE Agreement: Joint Capital Enhancement Agreement, as amended, among the 11 FHLBanks
LCH: LCH.Clearnet LLC
LIBOR: London Interbank Offered Rate
LRA: Lender Risk Account
LTV: Loan-to-Value
MAP-21: Moving Ahead for Progress in the 21st Century Act, enacted on July 6, 2012
MBS: Mortgage-Backed Securities
MCC: Master Commitment Contract
MDC: Mandatory Delivery Commitment
Moody's: Moody's Investor Services
MPF: Mortgage Partnership Finance®
MPP: Mortgage Purchase Program, including Original and Advantage unless indicated otherwise
MRCS: Mandatorily Redeemable Capital Stock
MVE: Market Value of Equity
NRSRO: Nationally Recognized Statistical Rating Organization
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income (Loss)
OIS: Overnight-Indexed Swap
ORERC: Other Real Estate-Related Collateral
OTTI: Other-Than-Temporary Impairment or -Temporarily Impaired (as the context indicates)
PFI: Participating Financial Institution
PMI: Primary Mortgage Insurance
REMIC: Real Estate Mortgage Investment Conduit
REO: Real Estate Owned
RMBS: Residential Mortgage-Backed Securities
S&P: Standard & Poor's Rating Service
Safety and Soundness Act: Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended
SEC: Securities and Exchange Commission
Securities Act: Securities Act of 1933, as amended
SERP: Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Retirement Plan and/or a similar frozen plan
SETP: Federal Home Loan Bank of Indianapolis 2016 Supplemental Executive Thrift Plan, as amended
SMI: Supplemental Mortgage Insurance
SOFR: Secured Overnight Financing Rate
TBA: To Be Announced, a forward contract for the purchase or sale of MBS at a future agreed-upon date for an established price
TDR: Troubled Debt Restructuring
TVA: Tennessee Valley Authority
UPB: Unpaid Principal Balance
VaR: Value at Risk
VIE: Variable Interest Entity
WAIR: Weighted-Average Interest Rate
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Presentation
This discussion and analysis by management of the Bank's financial condition and results of operations should be read in conjunction with our 2018 Form 10-K and the Financial Statements and related Notes to Financial Statements contained in Item 1. Financial Statements.
Unless otherwise stated, amounts disclosed in this Item are rounded to the nearest million; therefore, dollar amounts of less than one million may not be reflected or, due to rounding, may not appear to agree to the amounts presented in thousands in the Financial Statements and related Notes to Financial Statements. Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations based upon the disclosed amounts (millions) may not produce the same results.
Executive Summary
Overview. We are a regional wholesale bank that serves as a financial intermediary between the capital markets and our members. We primarily make secured loans in the form of advances to our members and purchase whole mortgage loans from our members. Additionally, we purchase other investments and provide other financial services to our members. As an FHLBank, we are generally designed to expand and contract in asset size as the needs of our members and their communities change over time.
Our principal source of funding is the proceeds from the sale to the public of FHLBank debt instruments, called consolidated obligations, which are the joint and several obligation of all FHLBanks. We obtain additional funds from deposits, other borrowings, and the issuance of capital stock to our members.
Our primary source of revenue is interest earned on advances, mortgage loans, and long- and short-term investments.
Our net interest income is primarily determined by the spread between the interest rate earned on our assets and the interest rate paid on our share of consolidated obligations. We use funding and hedging strategies to manage the related interest-rate risk.
Due to our cooperative structure and wholesale nature, we typically earn a narrow interest spread. Accordingly, our net income is relatively low compared to our total assets and capital.
We group our products and services within two operating segments: traditional and mortgage loans.
Economic Environment. The Bank’s financial performance is influenced by a number of regional and national economic and market factors, including the level and volatility of market interest rates, inflation or deflation, monetary policies, and the strength of housing markets.
At its meeting in March 2019, the FOMC announced that it is keeping the Federal Funds target rate unchanged at 2.25% - 2.5%. The accompanying statement indicated that it is maintaining a cautious and data-dependent approach to setting short-term interest rate targets, considering the current and expected rates of inflation and global economic conditions. Furthermore, the FOMC announced its intent to decelerate the monthly sale of bond holdings from "up to $30 billion" to "up to $15 billion" beginning in May 2019, and verified its plan to end the ongoing balance sheet runoff of bonds in September of 2019, barring any unforeseen global economic and market conditions.
Yields on U.S. Treasuries decreased during the first quarter of 2019 relative to the prevailing yields at the end of the fourth quarter of 2018. Over the course of the first quarter of 2019, parts of the U.S. Treasury yield curve were inverted, meaning the shorter-term bond yields exceeded longer-term bond yields. This market condition has often been a precursor to slowing economic growth and is one of many leading economic indicators that are often used by economists in economic forecasting. Despite the periodic instances of an inversion of the yield curve in certain maturity ranges in the first quarter, the Conference Board’s March 2019 leading economic index increased by 0.4%, following a 0.14% increase in February and no change in January. The Conference Board’s assessment of the March leading, coincident, and lagging indicators is that U.S. economic growth continues to moderate and is "likely to decelerate toward its long-term potential of about 2% by year end." During the first quarter, both domestic and international stock market indices reported solid total returns. At March 31, 2019, the S&P 500 posted a year-to-date total return of 13.6%, following a total return of -6.24% in 2018. Labor markets remain tight with the March 2019 Bureau of Labor Statistics release reporting the national unemployment rate of 3.8%. Notable job gains occurred in health care and professional services.
Housing markets had begun to show signs of faltering toward the end of 2018 in terms of housing starts and new mortgage applications. However, according to the National Association of Realtors (NAR), housing markets began to "surge" in February, led by an increase in sales of 1-4 family homes, which were up 11.8% over January. The monthly increase was the largest month-over-month gain since December 2015. Home prices have continued to increase rapidly, leading to a shortage of affordable housing units. The NAR reports that housing inventory, in terms of months of market supply, has declined steadily over the past 9 months, leading to further home price appreciation.
Impact on Operating Results. Market interest rates and trends affect yields and margins on earning assets, including advances, purchased mortgage loans, and our investment portfolio, which contribute to our overall profitability. Additionally, market interest rates drive mortgage origination and prepayment activity, which can lead to both favorable and unfavorable net interest margin volatility in our MPP and MBS portfolios. A flat or inverted yield curve, in which the difference between short-term interest rates and long-term interest rates is low, or negative, respectively, can have an unfavorable impact on our net interest margins.
Lending and investing activity by our member institutions is a key driver for our balance sheet and income growth. Such activity is a function of both prevailing interest rates and economic activity, including local economic factors, particularly relating to the housing and mortgage markets. Positive economic trends could drive interest rates higher, which could impair growth of the mortgage market. A less active mortgage market could affect demand for advances and activity levels in our Advantage MPP. However, borrowing patterns between our insurance company and depository members tend to differ during various economic and market conditions, thereby easing the potential magnitude of core business fluctuations during business cycles. Member demand for liquidity during stressed market conditions can lead to advances growth.
Selected Financial Data
The following table presents a summary of selected financial information ($ amounts in millions).
As of and for the Three Months Ended | ||||||||||||||||||||
March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | ||||||||||||||||
Statement of Condition: | ||||||||||||||||||||
Advances | $ | 32,830 | $ | 32,728 | $ | 33,567 | $ | 33,888 | $ | 32,965 | ||||||||||
Mortgage loans held for portfolio, net | 11,398 | 11,385 | 11,294 | 10,888 | 10,496 | |||||||||||||||
Cash and short-term investments | 6,787 | 7,610 | 8,056 | 6,279 | 4,386 | |||||||||||||||
Investment securities | 14,985 | 13,378 | 13,240 | 13,069 | 13,222 | |||||||||||||||
Total assets | 66,383 | 65,412 | 66,472 | 64,452 | 61,392 | |||||||||||||||
Discount notes | 21,254 | 20,895 | 22,650 | 21,987 | 19,556 | |||||||||||||||
CO bonds | 40,376 | 40,266 | 39,564 | 38,123 | 37,779 | |||||||||||||||
Total consolidated obligations | 61,630 | 61,161 | 62,214 | 60,110 | 57,335 | |||||||||||||||
MRCS | 174 | 169 | 164 | 181 | 164 | |||||||||||||||
Capital stock | 1,985 | 1,931 | 1,901 | 1,892 | 1,881 | |||||||||||||||
Retained earnings | 1,084 | 1,078 | 1,061 | 1,043 | 993 | |||||||||||||||
AOCI | 70 | 42 | 95 | 86 | 135 | |||||||||||||||
Total capital | 3,139 | 3,051 | 3,057 | 3,021 | 3,009 | |||||||||||||||
Statement of Income: | ||||||||||||||||||||
Net interest income | $ | 57 | $ | 75 | $ | 73 | $ | 70 | $ | 70 | ||||||||||
Provision for (reversal of) credit losses | — | — | — | — | — | |||||||||||||||
Other income (loss) | 3 | (9 | ) | (7 | ) | 31 | 6 | |||||||||||||
Other expenses | 23 | 23 | 23 | 24 | 22 | |||||||||||||||
AHP assessments | 4 | 4 | 4 | 8 | 6 | |||||||||||||||
Net income | $ | 33 | $ | 39 | $ | 39 | $ | 69 | $ | 48 | ||||||||||
Selected Financial Ratios: | ||||||||||||||||||||
Net interest margin (1) | 0.36 | % | 0.46 | % | 0.44 | % | 0.45 | % | 0.46 | % | ||||||||||
Return on average equity (2) | 4.37 | % | 5.01 | % | 5.05 | % | 6.20 | % | 6.57 | % | ||||||||||
Return on average assets (2) | 0.21 | % | 0.24 | % | 0.23 | % | 0.30 | % | 0.31 | % | ||||||||||
Weighted average dividend rate (3) | 5.50 | % | 4.50 | % | 4.50 | % | 4.25 | % | 6.75 | % | ||||||||||
Dividend payout ratio (4) | 79.99 | % | 55.66 | % | 54.18 | % | 28.50 | % | 64.15 | % | ||||||||||
Total capital ratio (5) | 4.73 | % | 4.66 | % | 4.60 | % | 4.69 | % | 4.90 | % | ||||||||||
Total regulatory capital ratio (6) | 4.89 | % | 4.86 | % | 4.70 | % | 4.83 | % | 4.95 | % | ||||||||||
Average equity to average assets | 4.75 | % | 4.70 | % | 4.62 | % | 4.83 | % | 4.75 | % |
(1) | Annualized net interest income expressed as a percentage of average interest-earning assets. |
(2) | Annualized, as appropriate. |
(3) | Annualized dividends paid in cash during the period divided by the average amount of Class B capital stock eligible for dividends under our capital plan, excluding MRCS. |
(4) | Dividends paid in cash during the period divided by net income for the period. By dividing dividends paid in cash during the period by the net income for the prior period, the dividend payout ratios for each of the three months ended March 31, 2019, December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018, would be 69%, 55%, 31%, 41% and 67%, respectively. |
(5) | Capital stock plus retained earnings and AOCI expressed as a percentage of total assets. |
(6) | Capital stock plus retained earnings and MRCS expressed as a percentage of total assets. |
Results of Operations and Changes in Financial Condition
Results of Operations for the Three Months Ended March 31, 2019 and 2018. The following table presents the comparative highlights of our results of operations ($ amounts in millions).
Three Months Ended March 31, | |||||||||||||||
Comparative Highlights | 2019 | 2018 | $ Change | % Change | |||||||||||
Net interest income | $ | 57 | $ | 70 | $ | (13 | ) | (19 | %) | ||||||
Provision for (reversal of) credit losses | — | — | — | ||||||||||||
Net interest income after provision for credit losses | 57 | 70 | (13 | ) | (19 | %) | |||||||||
Other income (loss) | 3 | 6 | (3 | ) | |||||||||||
Other expenses | 23 | 22 | 1 | ||||||||||||
Income before assessments | 37 | 54 | (17 | ) | (31 | %) | |||||||||
AHP assessments | 4 | 6 | (2 | ) | |||||||||||
Net income | 33 | 48 | (15 | ) | (31 | %) | |||||||||
Total other comprehensive income (loss) | 27 | 23 | 4 | ||||||||||||
Total comprehensive income | $ | 60 | $ | 71 | $ | (11 | ) | (15 | %) |
The decrease in net income for the three months ended March 31, 2019 compared to the corresponding period in the prior year was primarily due to hedging losses resulting from derivatives in a fair-value relationship. In general, we hold the derivatives and associated hedged items to the maturity, call, or put date. As a result, we expect to recover nearly all of the net losses on these financial instruments over the remaining contractual terms of the hedged items.
Changes in Financial Condition for the Three Months Ended March 31, 2019. The following table presents the comparative highlights of our changes in financial condition ($ amounts in millions).
Condensed Statements of Condition | March 31, 2019 | December 31, 2018 | $ Change | % Change | |||||||||||
Advances | $ | 32,830 | $ | 32,728 | $ | 102 | — | % | |||||||
Mortgage loans held for portfolio, net | 11,398 | 11,385 | 13 | — | % | ||||||||||
Cash and short-term investments (1) | 6,787 | 7,610 | (823 | ) | (11 | %) | |||||||||
Investment securities and other assets (2) | 15,368 | 13,689 | 1,679 | 12 | % | ||||||||||
Total assets | $ | 66,383 | $ | 65,412 | $ | 971 | 1 | % | |||||||
Consolidated obligations | $ | 61,630 | $ | 61,161 | $ | 469 | 1 | % | |||||||
MRCS | 174 | 169 | 5 | 3 | % | ||||||||||
Other liabilities | 1,440 | 1,031 | 409 | 40 | % | ||||||||||
Total liabilities | 63,244 | 62,361 | 883 | 1 | % | ||||||||||
Capital stock | 1,985 | 1,931 | 54 | 3 | % | ||||||||||
Retained earnings (3) | 1,084 | 1,078 | 6 | 1 | % | ||||||||||
AOCI | 70 | 42 | 28 | 65 | % | ||||||||||
Total capital | 3,139 | 3,051 | 88 | 3 | % | ||||||||||
Total liabilities and capital | $ | 66,383 | $ | 65,412 | $ | 971 | 1 | % | |||||||
Total regulatory capital (4) | $ | 3,243 | $ | 3,178 | $ | 65 | 2 | % |
(1) | Includes cash, interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold. |
(2) | Includes trading, AFS and HTM securities. |
(3) | Includes restricted retained earnings at March 31, 2019 and December 31, 2018 of $229 million and $222 million, respectively. |
(4) | Total capital less AOCI plus MRCS. |
The increase in total assets at March 31, 2019 compared to December 31, 2018 was primarily driven by purchases of investment securities.
The increase in total liabilities at March 31, 2019 compared to December 31, 2018 was attributable to a net increase in consolidated obligations to support the Bank's growth in assets, an increase in traded but not settled securities purchases and an increase in deposit liabilities due to member preferences.
The increase in total capital at March 31, 2019 compared to December 31, 2018 was primarily due to additional capital stock issued and comprehensive income, partially offset by dividends to shareholders.
Analysis of Results of Operations for the Three Months Ended March 31, 2019 and 2018.
Net Interest Income. The decrease in net interest income for the three months ended March 31, 2019 compared to the corresponding period in 2018 was primarily due to hedging losses resulting from derivatives in a fair-value relationship. In accordance with an amendment to accounting guidance effective January 1, 2019, hedging gains (losses) on qualifying fair- value hedging relationships are reported prospectively in net interest income instead of other income. As a result, net interest income after provision for credit losses for the first quarter of 2019 was reduced by $14 million.
The following table presents average daily balances, interest income/expense, and average yields of our major categories of interest-earning assets and their funding sources ($ amounts in millions).
Three Months Ended March 31, | |||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield (1) | Average Balance | Interest Income/ Expense | Average Yield (1) | ||||||||||||||||
Assets: | |||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | 6,624 | $ | 40 | 2.46 | % | $ | 4,769 | $ | 17 | 1.48 | % | |||||||||
Investment securities (2) | 14,141 | 93 | 2.67 | % | 12,963 | 75 | 2.36 | % | |||||||||||||
Advances (3) | 31,473 | 212 | 2.73 | % | 33,246 | 144 | 1.75 | % | |||||||||||||
Mortgage loans held for portfolio (3) | 11,384 | 96 | 3.43 | % | 10,426 | 84 | 3.25 | % | |||||||||||||
Other assets (interest-earning) (4) | 774 | 4 | 2.23 | % | 941 | 3 | 1.39 | % | |||||||||||||
Total interest-earning assets | 64,396 | 445 | 2.81 | % | 62,345 | 323 | 2.10 | % | |||||||||||||
Other assets (5) | 372 | 455 | |||||||||||||||||||
Total assets | $ | 64,768 | $ | 62,800 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Interest-bearing deposits | $ | 547 | 3 | 2.22 | % | $ | 610 | 2 | 1.31 | % | |||||||||||
Discount notes | 19,834 | 119 | 2.44 | % | 20,589 | 70 | 1.39 | % | |||||||||||||
CO bonds (3) | 40,303 | 263 | 2.65 | % | 37,979 | 178 | 1.90 | % | |||||||||||||
MRCS | 173 | 3 | 6.38 | % | 164 | 3 | 6.79 | % | |||||||||||||
Total interest-bearing liabilities | 60,857 | 388 | 2.59 | % | 59,342 | 253 | 1.73 | % | |||||||||||||
Other liabilities | 835 | 475 | |||||||||||||||||||
Total capital | 3,076 | 2,983 | |||||||||||||||||||
Total liabilities and capital | $ | 64,768 | $ | 62,800 | |||||||||||||||||
Net interest income | $ | 57 | $ | 70 | |||||||||||||||||
Net spread on interest-earning assets less interest-bearing liabilities | 0.22 | % | 0.37 | % | |||||||||||||||||
Net interest margin (6) | 0.36 | % | 0.46 | % | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 1.06 | 1.05 |
(1) | Annualized. |
(2) | Consists of trading, AFS and HTM securities. The average balances of AFS securities are based on amortized cost; therefore, the resulting yields do not reflect changes in the estimated fair value that are a component of OCI. Interest income/expense includes the effects of associated derivative transactions. |
(3) | Interest income/expense and average yield include all other components of interest, including the impact of net interest payments or receipts on derivatives in qualifying hedge relationships, amortization of hedge accounting adjustments, and prepayment fees on advances. |
(4) | Consists of interest-bearing deposits and loans to other FHLBanks (if applicable). Includes the rights or obligations to cash collateral, except for variation margin payments characterized as daily settled contracts. |
(5) | Includes changes in the estimated fair value of AFS securities, grantor trust assets, and in 2018, the effect of OTTI-related non-credit losses on AFS and HTM securities. |
(6) | Annualized net interest income expressed as a percentage of the average balance of interest-earning assets. |
Yields. The average yield on total interest-earning assets for the three months ended March 31, 2019 was 2.81%, an increase of 71 bps compared to the corresponding period in 2018, resulting primarily from increases in market interest rates that led to higher yields on advances and investments. The average cost of total interest-bearing liabilities was 2.59%, an increase of 86 bps due to higher funding costs on consolidated obligations. The net effect was a decrease in the net interest spread of 15 bps to 0.22% for the three months ended March 31, 2019 from 0.37% for the corresponding period in 2018. Including the hedging losses from derivatives in a fair-value relationship prospectively in net interest income for the three months ended March 31, 2019 caused 9 bps of that net decrease.
Average Balances. The average balances outstanding of interest earning assets for the three months ended March 31, 2019 increased by 3% compared to the corresponding period in 2018. The average balance of short-term investments increased by 39% in light of new liquidity guidance from the Finance Agency. The average balance of investment securities increased by 9% due to purchases of trading and AFS securities. The average balance of mortgage loans held for portfolio increased by 9% due to strong demand by our members for Advantage MPP. These increases were partially offset by a decrease in the average balance of advances of 5%, generally driven by member funding needs. The increase in average interest-bearing liabilities was due to an increase in consolidated obligations outstanding to fund the increases in the average balances of interest-earning assets.
Provision for Credit Losses. The change in the provision for (reversal of) credit losses for the three months ended March 31, 2019 compared to the corresponding period in 2018 was insignificant.
Other Income. The following table presents a comparison of the components of other income ($ amounts in millions).
Three Months Ended March 31, | ||||||||
Components | 2019 | 2018 | ||||||
Net gains (losses) on trading securities | $ | 4 | $ | — | ||||
Net gains (losses) on derivatives and hedging activities | (3 | ) | 6 | |||||
Other | 2 | — | ||||||
Total other income (loss) | $ | 3 | $ | 6 |
The decrease in total other income for the three months ended March 31, 2019 compared to the corresponding period in 2018 was primarily due to net losses on derivatives and hedging activities, partially offset by net gains on trading securities.
Net Gains (Losses) on Trading Securities. In January 2019, the Bank began purchasing U.S. Treasury securities. Those securities are classified as trading securities and are recorded at fair value, with changes in fair value reported in other income. There are a number of factors that affect the fair value of these securities, including changes in interest rates, the passage of time, and volatility. These trading securities are being hedged, so that over time the gains (losses) on these securities will be generally offset by the change in fair value of the associated derivatives.
Net Gains (Losses) on Derivatives and Hedging Activities. In prior periods, for qualifying fair-value hedging relationships, the differences between the change in the estimated fair value of the hedged items attributable to the hedged risk and the change in the estimated fair value of the associated interest-rate swaps, i.e., hedge ineffectiveness, were reported in other income. Beginning January 1, 2019, such differences are reported in net interest income. See Notes to Financial Statements - Note 2 - Recently Adopted Accounting Guidance for more information.
The table below presents the net effect of derivatives and hedging activities that are reported in either net interest income or other income ($ amounts in millions).
Three Months Ended March 31, | ||||||||
Components | 2019 | 2018 | ||||||
Net changes in fair value (1) | $ | (14 | ) | $ | 7 | |||
Price alignment interest (2) | (1 | ) | — | |||||
Net interest settlements on derivatives (1) (3) | 17 | (1 | ) | |||||
Amortization/accretion of hedging relationships | (3 | ) | — | |||||
Net gains on trading securities | 4 | — | ||||||
Net gains (losses) on derivatives not designated as hedging instruments (3) (4) | (3 | ) | (1 | ) | ||||
Net effect of derivatives and hedging activities (3) | $ | — | $ | 5 |
(1) | Relates to derivatives and hedged items in qualifying fair-value hedging relationships. |
(2) | Relates to derivatives for which variation margin payments are characterized as daily settled contracts. |
(3) | Excludes the interest income/expense of the respective hedged items. |
(4) | Includes net interest settlements on derivatives that are not in qualifying fair-value hedging relationships. |
The changes in fair value for the three months ended March 31, 2019 and 2018 were primarily due to marginal mismatches in durations on, and the increase in volume of, swapped GSE MBS, particularly Fannie Mae Delegated Underwriting and Servicing (DUS) MBS. As a result of issuing floating rate notes to fund these MBS purchases instead of swapped fixed-rate notes, the funding and operational costs have been reduced but there is less offsetting hedge impact, resulting in higher hedging gains or losses.
However, since we generally hold derivatives and hedged items to the maturity, call or put date, we expect to recover nearly all of the net hedging losses on our financial instruments for the three months ended March 31, 2019 over the remaining contractual terms of the hedged items.
Other Expenses. The following table presents a comparison of the components of other expenses ($ amounts in millions).
Three Months Ended March 31, | ||||||||
Components | 2019 | 2018 | ||||||
Compensation and benefits | $ | 14 | $ | 13 | ||||
Other operating expenses | 6 | 6 | ||||||
Finance Agency and Office of Finance expenses | 2 | 2 | ||||||
Other | 1 | 1 | ||||||
Total other expenses | $ | 23 | $ | 22 |
The increase in total other expenses for the three months ended March 31, 2019 compared to the corresponding period in 2018 was primarily due to increases in compensation, primarily driven by salary increases and higher head count.
Total Other Comprehensive Income (Loss). Total OCI for the three months ended March 31, 2019 and 2018 consisted substantially of unrealized gains on AFS securities.
Operating Segments
Our products and services are grouped within two operating segments: traditional and mortgage loans.
Traditional. The traditional segment consists of (i) credit products (including advances, letters of credit, and lines of credit), (ii) investments (including federal funds sold, securities purchased under agreements to resell, interest-bearing demand deposit accounts, and investment securities), and (iii) correspondent services and deposits. The following table presents the financial performance of our traditional segment ($ amounts in millions).
Three Months Ended March 31, | ||||||||
Traditional | 2019 | 2018 | ||||||
Net interest income | $ | 39 | $ | 52 | ||||
Provision for (reversal of) credit losses | — | — | ||||||
Other income (loss) | 3 | 6 | ||||||
Other expenses | 20 | 19 | ||||||
Income before assessments | 22 | 39 | ||||||
AHP assessments | 2 | 4 | ||||||
Net income | $ | 20 | $ | 35 |
The decrease in net income for the traditional segment for the three months ended March 31, 2019 compared to the corresponding period in 2018 was primarily due to hedging losses resulting from derivatives in a fair-value relationship. In accordance with an amendment to accounting guidance effective January 1, 2019, hedging gains (losses) on qualifying fair- value hedging relationships are reported prospectively in net interest income instead of other income.
Mortgage Loans. The mortgage loans segment includes (i) mortgage loans purchased from our members through our MPP and (ii) participating interests purchased in 2012 - 2014 from the FHLBank of Topeka in mortgage loans originated by certain of its PFIs under the MPF Program. The following table presents the financial performance of our mortgage loans segment ($ amounts in millions).
Three Months Ended March 31, | ||||||||
Mortgage Loans | 2019 | 2018 | ||||||
Net interest income | $ | 18 | $ | 18 | ||||
Provision for (reversal of) credit losses | — | — | ||||||
Other income (loss) | — | — | ||||||
Other expenses | 3 | 3 | ||||||
Income before assessments | 15 | 15 | ||||||
AHP assessments | 2 | 2 | ||||||
Net income | $ | 13 | $ | 13 |
The slight increase in net income for the mortgage loans segment for the three months ended March 31, 2019 compared to the corresponding period in 2018 (in thousands) was due to higher net interest income, due primarily to higher average balances.
Analysis of Financial Condition
Total Assets. The table below presents the comparative highlights of our major asset categories ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
Major Asset Categories | Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
Advances | $ | 32,830 | 49 | % | $ | 32,728 | 50 | % | ||||||
Mortgage loans held for portfolio, net | 11,398 | 17 | % | 11,385 | 17 | % | ||||||||
Cash and short-term investments | 6,787 | 10 | % | 7,610 | 12 | % | ||||||||
Investment securities | 14,985 | 23 | % | 13,378 | 21 | % | ||||||||
Other assets (1) | 383 | 1 | % | 311 | — | % | ||||||||
Total assets | $ | 66,383 | 100 | % | $ | 65,412 | 100 | % |
(1) | Includes accrued interest receivable, premises, software and equipment, derivative assets and other miscellaneous assets. |
Total assets were $66.4 billion as of March 31, 2019, a net increase of $1.0 billion or 1% compared to December 31, 2018, primarily driven by purchases of investment securities.
Advances. Advances at carrying value totaled $32.8 billion at March 31, 2019, a net increase of $102 million or 0.3% compared to December 31, 2018.
Advances to depository members, comprising commercial banks, savings institutions and credit unions, decreased by 3%. Advances to insurance company members increased by 4%. Advances to depository institutions, as a percent of total advances outstanding, were 51% at March 31, 2019, while advances to insurance companies were 49%.
The table below presents advances outstanding by type of financial institution ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
Borrower Type | Par Value | % of Total | Par Value | % of Total | ||||||||||
Depository institutions: | ||||||||||||||
Commercial banks and savings institutions | $ | 13,806 | 42 | % | $ | 14,019 | 43 | % | ||||||
Credit unions | 2,755 | 9 | % | 3,099 | 10 | % | ||||||||
Total depository institutions | 16,561 | 51 | % | 17,118 | 53 | % | ||||||||
Insurance companies: | ||||||||||||||
Captive insurance companies (1) | 2,941 | 9 | % | 2,936 | 9 | % | ||||||||
Other insurance companies | 13,057 | 40 | % | 12,491 | 38 | % | ||||||||
Total insurance companies | 15,998 | 49 | % | 15,427 | 47 | % | ||||||||
Total members | 32,559 | 100 | % | 32,545 | 100 | % | ||||||||
Former members | 274 | — | % | 284 | — | % | ||||||||
Total advances | $ | 32,833 | 100 | % | $ | 32,829 | 100 | % |
(1) | Memberships must terminate no later than February 19, 2021. See certain restrictions on and maturities of advances in Notes to Financial Statements - Note 5 - Advances in the 2018 Form 10-K. |
Our advance portfolio is well-diversified with advances to commercial banks and savings institutions, credit unions, and insurance companies. Borrowing patterns between our insurance company and depository members tend to differ during various economic and market conditions, thereby easing the potential magnitude of core business fluctuations during business cycles.
Our advance portfolio includes fixed- and variable-rate advances, as well as callable or prepayable and putable advances. Prepayable advances may be prepaid on specified dates without incurring repayment or termination fees. All other advances may only be prepaid by the borrower paying a fee that is sufficient to make us financially indifferent to the prepayment of the advance.
The following table presents the par value of advances outstanding by product type and redemption term, some of which contain call or put options ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
Product Type and Redemption Term | Par Value | % of Total | Par Value | % of Total | ||||||||||
Fixed-rate: | ||||||||||||||
Fixed-rate (1) | ||||||||||||||
Due in 1 year or less | $ | 13,965 | 43 | % | $ | 14,670 | 45 | % | ||||||
Due after 1 year | 7,342 | 22 | % | 6,927 | 21 | % | ||||||||
Total | 21,307 | 65 | % | 21,597 | 66 | % | ||||||||
Callable or prepayable | ||||||||||||||
Due in 1 year or less | 10 | — | % | 10 | — | % | ||||||||
Due after 1 year | 49 | — | % | 39 | — | % | ||||||||
Total | 59 | — | % | 49 | — | % | ||||||||
Putable | ||||||||||||||
Due in 1 year or less | — | — | % | — | — | % | ||||||||
Due after 1 year | 3,784 | 12 | % | 3,103 | 10 | % | ||||||||
Total | 3,784 | 12 | % | 3,103 | 10 | % | ||||||||
Other (2) | ||||||||||||||
Due in 1 year or less | 122 | — | % | 133 | — | % | ||||||||
Due after 1 year | 134 | — | % | 140 | — | % | ||||||||
Total | 256 | — | % | 273 | — | % | ||||||||
Total fixed-rate | 25,406 | 77 | % | 25,022 | 76 | % | ||||||||
Variable-rate: | ||||||||||||||
Variable-rate (1) | ||||||||||||||
Due in 1 year or less | 77 | — | % | 349 | 1 | % | ||||||||
Due after 1 year | 30 | — | % | — | — | % | ||||||||
Total | 107 | — | % | 349 | 1 | % | ||||||||
Callable or prepayable | ||||||||||||||
Due in 1 year or less | 689 | 2 | % | 435 | 1 | % | ||||||||
Due after 1 year | 6,631 | 21 | % | 7,023 | 22 | % | ||||||||
Total | 7,320 | 23 | % | 7,458 | 23 | % | ||||||||
Total variable-rate | 7,427 | 23 | % | 7,807 | 24 | % | ||||||||
Total advances | $ | 32,833 | 100 | % | $ | 32,829 | 100 | % |
(1) | Includes advances without call or put options. |
(2) | Includes hybrid, fixed-rate amortizing/mortgage matched advances. |
Advances due in one year or less decreased from 47% of the total outstanding, at par, at December 31, 2018 to 45% of the total outstanding, at par, at March 31, 2019, reflecting members' decreased demand for short-term funding. See Notes to Financial Statements - Note 4 - Advances for additional information.
Mortgage Loans Held for Portfolio. A breakdown of mortgage loans held for portfolio by primary product type is presented below ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
Product Type | UPB | % of Total | UPB | % of Total | ||||||||||
MPP: | ||||||||||||||
Conventional Advantage | $ | 9,932 | 89 | % | $ | 9,874 | 89 | % | ||||||
Conventional Original | 659 | 6 | % | 688 | 6 | % | ||||||||
FHA | 305 | 3 | % | 314 | 3 | % | ||||||||
Total MPP | 10,896 | 98 | % | 10,876 | 98 | % | ||||||||
MPF Program: | ||||||||||||||
Conventional | 202 | 2 | % | 208 | 2 | % | ||||||||
Government | 53 | — | % | 54 | — | % | ||||||||
Total MPF Program | 255 | 2 | % | 262 | 2 | % | ||||||||
Total mortgage loans held for portfolio | $ | 11,151 | 100 | % | $ | 11,138 | 100 | % |
The increase in the UPB of mortgage loans held for portfolio was due to purchases under Advantage MPP exceeding repayments of outstanding MPP and MPF Program loans. Over time, the outstanding balance of mortgage loans purchased under our original MPP and the MPF Program will continue to decrease.
We have established and maintain an allowance for loan losses based on our best estimate of probable losses over the loss emergence period, which we have estimated to be 24 months. Our estimate of MPP losses remaining after borrower's equity, but before credit enhancements, was $4 million at both March 31, 2019 and December 31, 2018. After consideration of the portion recoverable under the associated credit enhancements, the resulting allowance for MPP loan losses was less than $1 million at both March 31, 2019 and December 31, 2018. For more information, see Notes to Financial Statements - Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.
Cash and Investments. The following table presents a comparison of the components of our cash and investments at carrying value ($ amounts in millions).
Components of Cash and Investments | March 31, 2019 | December 31, 2018 | Change | |||||||||
Cash and short-term investments: | ||||||||||||
Cash and due from banks | $ | 73 | $ | 101 | $ | (28 | ) | |||||
Interest-bearing deposits | 317 | 1,211 | (894 | ) | ||||||||
Securities purchased under agreements to resell | 3,297 | 3,213 | 84 | |||||||||
Federal funds sold | 3,100 | 3,085 | 15 | |||||||||
Total cash and short-term investments | 6,787 | 7,610 | (823 | ) | ||||||||
Investment securities: | ||||||||||||
Trading securities: | ||||||||||||
U.S. obligations | 1,122 | — | 1,122 | |||||||||
Total trading securities | 1,122 | — | 1,122 | |||||||||
AFS securities: | ||||||||||||
GSE and TVA debentures | 4,338 | 4,277 | 61 | |||||||||
GSE MBS | 4,070 | 3,427 | 643 | |||||||||
Total AFS securities | 8,408 | 7,704 | 704 | |||||||||
HTM securities: | ||||||||||||
Other U.S. obligations - guaranteed MBS | 3,389 | 3,469 | (80 | ) | ||||||||
GSE MBS | 2,066 | 2,205 | (139 | ) | ||||||||
Total HTM securities | 5,455 | 5,674 | (219 | ) | ||||||||
Total investment securities | 14,985 | 13,378 | 1,607 | |||||||||
Total cash and investments, carrying value | $ | 21,772 | $ | 20,988 | $ | 784 |
Cash and Short-Term Investments. Cash and short-term investments totaled $6.8 billion at March 31, 2019, a decrease of 11% compared to December 31, 2018, due to the Bank's purchase of U.S. Treasuries as trading securities to enhance its liquidity in light of new liquidity guidance from the Finance Agency. Cash and short-term investments as a percent of total assets were 10% at March 31, 2019, compared to 12% at December 31, 2018.
Investment Securities. In January 2019, the Bank began purchasing U.S. Treasuries as trading securities. Trading securities totaled $1.1 billion at March 31, 2019.
AFS securities totaled $8.4 billion at March 31, 2019, a net increase of 9% compared to $7.7 billion at December 31, 2018. The increase resulted from purchases of GSE MBS to maintain a ratio of MBS and ABS to total regulatory capital of up to 300%.
Net unrealized gains on AFS securities totaled $80 million at March 31, 2019, an increase of $27 million compared to December 31, 2018, primarily due to changes in interest rates, credit spreads and volatility.
HTM securities totaled $5.5 billion at March 31, 2019, a net decrease of 4% compared to $5.7 billion at December 31, 2018. At March 31, 2019, the estimated fair value of our HTM securities totaled $5.5 billion, of which $2.8 billion was in an unrealized loss position, an increase of 16% from $2.4 billion at December 31, 2018, primarily due to changes in interest rates, credit spreads and volatility. The associated unrealized losses increased from $16 million at December 31, 2018 to $18 million at March 31, 2019.
Interest-Rate Payment Terms. Our AFS and HTM securities are presented below at amortized cost by interest-rate payment terms ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
Interest-Rate Payment Terms | Amortized Cost | % of Total | Amortized Cost | % of Total | ||||||||||
AFS Securities: | ||||||||||||||
Total non-MBS fixed-rate | $ | 4,294 | 52 | % | $ | 4,240 | 55 | % | ||||||
MBS: | ||||||||||||||
Fixed-rate | 4,034 | 48 | % | 3,411 | 45 | % | ||||||||
Total MBS | 4,034 | 48 | % | 3,411 | 45 | % | ||||||||
Total AFS securities | $ | 8,328 | 100 | % | $ | 7,651 | 100 | % | ||||||
HTM Securities: | ||||||||||||||
MBS: | ||||||||||||||
Fixed-rate | $ | 936 | 17 | % | $ | 936 | 16 | % | ||||||
Variable-rate | 4,519 | 83 | % | 4,738 | 84 | % | ||||||||
Total MBS | 5,455 | 100 | % | 5,674 | 100 | % | ||||||||
Total HTM securities | $ | 5,455 | 100 | % | $ | 5,674 | 100 | % | ||||||
AFS and HTM Investment Securities: | ||||||||||||||
Total fixed-rate | $ | 9,264 | 67 | % | $ | 8,587 | 64 | % | ||||||
Total variable-rate | 4,519 | 33 | % | 4,738 | 36 | % | ||||||||
Total AFS and HTM investment securities | $ | 13,783 | 100 | % | $ | 13,325 | 100 | % |
The mix of fixed- vs. variable-rate AFS and HTM securities at March 31, 2019 was slightly higher compared to December 31, 2018, primarily due to purchases of fixed-rate MBS. However, all of the fixed-rate AFS securities are swapped to effectively create variable-rate securities, consistent with our balance sheet strategies to manage interest-rate risk.
Total Liabilities. Total liabilities were $63.2 billion at March 31, 2019, a net increase of 1% compared to December 31, 2018, substantially due to an increase in consolidated obligations.
Deposits (Liabilities). Total deposits were $699 million at March 31, 2019, a net increase of 40% compared to December 31, 2018. These deposits represent a relatively small portion of our funding. The balances of these accounts can fluctuate from period to period and vary depending upon such factors as the attractiveness of our deposit pricing relative to the rates available on alternative money market instruments, members' preferences with respect to the maturity of their investments, and members' liquidity.
Consolidated Obligations. The carrying value of consolidated obligations outstanding at March 31, 2019 totaled $61.6 billion, a net increase of $469 million or 1% from December 31, 2018. This increase supported the increase in the Bank's assets.
The following table presents a breakdown by term of our consolidated obligations outstanding ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
By Term | Par Value | % of Total | Par Value | % of Total | ||||||||||
Consolidated obligations due in 1 year or less: | ||||||||||||||
Discount notes | $ | 21,321 | 35 | % | $ | 20,953 | 34 | % | ||||||
CO bonds | 19,752 | 32 | % | 18,457 | 30 | % | ||||||||
Total due in 1 year or less | 41,073 | 67 | % | 39,410 | 64 | % | ||||||||
Long-term CO bonds | 20,684 | 33 | % | 21,918 | 36 | % | ||||||||
Total consolidated obligations | $ | 61,757 | 100 | % | $ | 61,328 | 100 | % |
The percentage due in 1 year or less increased from 64% at December 31, 2018 to 67% at March 31, 2019 as a result of seeking to maintain a sufficient liquidity and funding balance between our financial assets and financial liabilities. Additionally, the FHLBanks work collectively to manage FHLB System-wide liquidity and funding and jointly monitor System-wide refinancing risk. In managing and monitoring the amounts of assets that require refunding, the FHLBanks may consider contractual maturities of the financial assets, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments and scheduled amortizations). For more detailed information regarding contractual maturities of certain of our financial assets and liabilities, see Notes to Financial Statements - Note 3 - Investment Securities, Note 4 - Advances, and Note 8 - Consolidated Obligations.
Derivatives. The volume of derivative hedges is often expressed in terms of notional amounts, which is the amount upon which interest payments are calculated. The following table presents the notional amounts by type of hedged item whether or not it is in a qualifying hedge relationship ($ amounts in millions).
Hedged Item | March 31, 2019 | December 31, 2018 | ||||||
Advances | $ | 14,895 | $ | 13,980 | ||||
Investments | 10,226 | 8,562 | ||||||
Mortgage loans | 1,101 | 1,038 | ||||||
CO bonds | 13,737 | 14,239 | ||||||
Total notional | $ | 39,959 | $ | 37,819 |
The increase in the total notional amount during the three months ended March 31, 2019 of 6% was primarily due to purchases of U.S. Treasuries in economic hedging relationships.
The following table presents the cumulative impact of fair-value hedging basis adjustments on our statements of condition ($ amounts in millions).
March 31, 2019 | Advances | Investments | CO Bonds | Total | ||||||||||||
Cumulative fair-value hedging basis adjustments on hedged items | $ | (7 | ) | $ | (98 | ) | $ | 55 | $ | (50 | ) | |||||
Estimated fair value of associated derivatives, net | 9 | 64 | (48 | ) | 25 | |||||||||||
Net cumulative fair-value hedging basis adjustments | $ | 2 | $ | (34 | ) | $ | 7 | $ | (25 | ) |
Total Capital. Total capital at March 31, 2019 was $3.1 billion, a net increase of $88 million or 3% compared to December 31, 2018. This increase was primarily a result of the additional capital stock issued and comprehensive income, partially offset by dividends to shareholders.
The following table presents a percentage breakdown of the components of GAAP capital.
Components | March 31, 2019 | December 31, 2018 | ||||
Capital stock | 63 | % | 63 | % | ||
Retained earnings | 35 | % | 36 | % | ||
AOCI | 2 | % | 1 | % | ||
Total GAAP capital | 100 | % | 100 | % |
The components of GAAP capital were relatively unchanged at March 31, 2019 compared to December 31, 2018.
The following table presents a reconciliation of GAAP capital to regulatory capital ($ amounts in millions).
Reconciliation | March 31, 2019 | December 31, 2018 | ||||||
Total GAAP capital | $ | 3,139 | $ | 3,051 | ||||
Exclude: AOCI | (70 | ) | (42 | ) | ||||
Add: MRCS | 174 | 169 | ||||||
Total regulatory capital | $ | 3,243 | $ | 3,178 |
Liquidity and Capital Resources
Liquidity. Our primary sources of liquidity are holdings of liquid assets, comprised of cash and short-term investments and trading securities, and the issuance of consolidated obligations.
Our cash and short-term investments totaled $6.8 billion at March 31, 2019. Our short-term investments generally consist of high-quality financial instruments, many of which mature overnight. Our trading securities totaled $1.1 billion at March 31, 2019 and consisted solely of U.S. Treasury securities. As a result, our liquidity portfolio at March 31, 2019 totaled $7.9 billion or 12% of total assets.
During the three months ended March 31, 2019, we maintained sufficient access to funding; our net proceeds from the issuance of consolidated obligations totaled $100.9 billion. However, to protect us against temporary disruptions in access to the debt markets, the Finance Agency currently requires us to: (i) maintain contingent liquidity sufficient to cover, at a minimum, ten calendar days of inability to issue consolidated obligations; (ii) have available at all times an amount greater than or equal to our members' current deposits invested in specific assets; (iii) maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to our participation in total consolidated obligations outstanding; and (iv) maintain, through short-term investments, an amount at least equal to our anticipated cash outflows under hypothetical adverse scenarios. For information concerning the Finance Agency’s liquidity guidance, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments - Advisory Bulletin in our 2018 Form 10-K.
Portions of the Finance Agency's liquidity guidance Advisory Bulletin relating to funding gap measures were implemented on December 31, 2018; the standby letters of credit component of the base case liquidity provisions was implemented by March 31, 2019. Phased-in measures for the cash flow component of the base case liquidity provisions began on March 31, 2019 with full implementation planned as required by December 31, 2019.
New or amended regulatory guidance from the Finance Agency could continue to increase the amount and change the characteristics of liquidity that we are required to maintain. We have not identified any other trends, demands, commitments, or events that are likely to materially increase or decrease our liquidity.
Changes in Cash Flow. Net cash used in operating activities was $82 million for the three months ended March 31, 2019, compared to net cash provided by operating activities of $165 million for the three months ended March 31, 2018. The decrease was substantially due to the fluctuation in variation margin payments on cleared derivatives. Such payments are treated by the clearinghouses as daily settled contracts.
Capital Resources.
Total Regulatory Capital. The following table provides a breakdown of our outstanding capital stock, categorized by type of member institution, and MRCS ($ amounts in millions).
March 31, 2019 | December 31, 2018 | |||||||||||||
By Type of Member Institution | Amount | % of Total | Amount | % of Total | ||||||||||
Depository institutions: | ||||||||||||||
Commercial banks and savings institutions | $ | 1,012 | 47 | % | $ | 985 | 47 | % | ||||||
Credit unions | 265 | 12 | % | 263 | 12 | % | ||||||||
Total depository institutions | 1,277 | 59 | % | 1,248 | 59 | % | ||||||||
Insurance companies | 709 | 33 | % | 683 | 33 | % | ||||||||
CDFIs | — | — | % | — | — | % | ||||||||
Total capital stock, putable at par value | 1,986 | 92 | % | 1,931 | 92 | % | ||||||||
MRCS: | ||||||||||||||
Captive insurance companies | 136 | 6 | % | 132 | 6 | % | ||||||||
Former members (1) | 38 | 2 | % | 37 | 2 | % | ||||||||
Total MRCS | 174 | 8 | % | 169 | 8 | % | ||||||||
Total regulatory capital stock | $ | 2,160 | 100 | % | $ | 2,100 | 100 | % |
(1) | Balances at both March 31, 2019 and December 31, 2018 include $1 million of MRCS that had reached the end of the five-year redemption period but will not be redeemed until the associated credit products and other obligations are no longer outstanding. |
Excess Capital Stock. The following table presents the composition of our excess capital stock ($ amounts in millions).
Components | March 31, 2019 | December 31, 2018 | ||||||
Member capital stock not subject to outstanding redemption requests | $ | 482 | $ | 450 | ||||
Member capital stock subject to outstanding redemption requests | 1 | 1 | ||||||
MRCS | 31 | 25 | ||||||
Total excess capital stock | $ | 514 | $ | 476 | ||||
Excess stock as a percentage of regulatory capital stock | 24 | % | 23 | % |
The increase in excess stock during the three months ended March 31, 2019 resulted primarily from advance activity.
Capital Distributions. On April 25, 2019, our board of directors declared a cash dividend of 5.50% (annualized) on our Class B-1 capital stock and 4.40% (annualized) on our Class B-2 capital stock.
Adequacy of Capital. We must maintain sufficient permanent capital to meet the combined credit risk, market risk and operations risk components of the risk-based capital requirement. As presented in the following table, we were in compliance with the risk-based capital requirement at March 31, 2019 and December 31, 2018 ($ amounts in millions).
Risk-Based Capital Components | March 31, 2019 | December 31, 2018 | ||||||
Credit risk | $ | 310 | $ | 307 | ||||
Market risk | 310 | 298 | ||||||
Operations risk | 186 | 182 | ||||||
Total risk-based capital requirement | $ | 806 | $ | 787 | ||||
Permanent capital | $ | 3,244 | $ | 3,178 |
The increase in the total risk-based capital requirement was primarily caused by a slight increase in the market risk component. Our permanent capital at March 31, 2019 remained well in excess of our total risk-based capital requirement.
Off-Balance Sheet Arrangements
At March 31, 2019, principal previously paid in full by our MPP servicers totaling $2 million remains subject to potential claims by those servicers for any losses resulting from past or future liquidations of the underlying properties. An estimate of the losses is included in the MPP allowance for loan losses. For more information, see Notes to Financial Statements - Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.
Critical Accounting Policies and Estimates
We determined that three of our accounting policies and estimates are critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These accounting policies pertain to:
• | Derivatives and hedging activities (see Notes to Financial Statements - Note 7 - Derivatives and Hedging Activities for more detail); |
• | Fair value estimates (see Notes to Financial Statements - Note 13 - Estimated Fair Values for more detail); and |
• | Provision for credit losses (see Notes to Financial Statements - Note 6 - Allowance for Credit Losses for more detail). |
A full discussion of our critical accounting policies and estimates is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our 2018 Form 10-K. See below for additional information regarding certain of these policies.
Provision for Credit Losses.
Mortgage Loans Acquired under the MPP. Our allowance for loan losses incorporates our analysis of delinquent conventional MPP loans, using the estimated fair value of the underlying collateral, further reduced by estimated liquidation costs.
As part of our loan loss analysis at December 31, 2018, we considered an adverse scenario whereby we used a haircut on our underlying collateral values of 20% for delinquent conventional loans, including individually evaluated loans. We consider such a haircut to represent the most distressed scenario that is reasonably possible to occur over the loss emergence period of 24 months. In this distressed scenario, while holding all other assumptions constant, our estimated incurred losses remaining after borrowers' equity, but before credit enhancements, would increase by approximately $2.2 million. However, such increase would be substantially offset by credit enhancements. Based upon subsequent changes in underlying collateral values, we would not expect this amount to have significantly changed at March 31, 2019. Therefore, the allowance for loan losses continues to be based upon our best estimate of the probable losses over the loss emergence period that would not be recovered from the credit enhancements.
Recent Accounting and Regulatory Developments
Accounting Developments. For a description of how recent accounting developments may impact our financial condition, results of operations or cash flows see Notes to Financial Statements - Note 2 - Recently Adopted Accounting Guidance.
Legislative and Regulatory Developments.
Joint Interim Final Rule on Margin and Capital Requirements for Covered Swap Entities. On March 19, 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Finance Agency (collectively, "Agencies") jointly adopted interim final rules ("Interim Rule") amending the Agencies’ regulations that established minimum margin and capital requirements ("Margin Rules") for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (collectively, "Covered Swap Entities") under the jurisdiction of one of the Agencies. The Interim Rule was adopted to assist Covered Swap Entities and their counterparties upon the expected withdrawal, currently delayed until October 31, 2019, of the United Kingdom ("UK") from the European Union ("EU"), commonly referred to as "Brexit". If the UK withdraws from the EU without a negotiated agreement between the UK and the EU, Covered Swap Entities located within the UK may not be authorized to continue providing certain financial services to swap counterparties that are located in the EU. The Interim Rule would permit Covered Swap Entities located within the UK to transfer their non-cleared swap portfolios to affiliates or other related entities located within the EU or the United States without subjecting legacy swaps (those swaps entered into before the compliance date of the Margin Rules) to the margin requirements of the Margin Rules, provided that the transfer is made within a year of a non-negotiated Brexit and there are no other amendments to the transactions.
We have UK-based uncleared swap counterparties that may choose to transfer their uncleared swap portfolios, including any such swaps with us, to a related entity in the EU or the United States. If any of our legacy uncleared swaps are transferred in accordance with the Interim Rule, those swaps will retain legacy status under the Margin Rules.
On April 1, 2019, the CFTC adopted its own version of the Interim Rule, which is substantially similar to the Agencies’ Interim Rule, but which applies to Covered Swap Entities that are not subject to the jurisdiction of one of the Agencies. Comments on the Interim Rule were due April 18, 2019 and are due on the CFTC’s version of the Interim Rule on May 31, 2019.
We do not expect the Interim Rule (or the CFTC's version of the Interim Rule) to materially affect our financial condition or results of operations.
Risk Management
We have exposure to a number of risks in pursuing our business objectives. These risks may be broadly classified as market, credit, liquidity, operational, and business. Market risk is discussed in Item 3. Quantitative and Qualitative Disclosures about Market Risk. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management in our 2018 Form 10-K for more information.
Credit Risk Management. We face credit risk on advances and other credit products, investments, mortgage loans, derivative financial instruments, and AHP grants.
Advances and Other Credit Products. New or renewed credit extensions to captive insurance companies that became members prior to September 12, 2014 are subject to certain regulatory restrictions relating to maturity dates and cannot exceed 40% of the member's total assets. As of March 31, 2019, one such captive insurance company member's total outstanding balance of credit products exceeded the percentage limit. Therefore, no new or renewed credit extensions have been extended to this member. We may impose additional restrictions on extensions of credit to our members, including captive insurance companies, at our discretion.
Concentration. Our credit risk is magnified due to the concentration of advances in a few borrowers. As of March 31, 2019, our top borrower held 13% of total advances outstanding, at par, and our top five borrowers held 40% of total advances outstanding, at par. As a result of this concentration, we perform frequent credit and collateral reviews on our largest borrowers. In addition, we analyze the implications to our financial management and profitability if we were to lose the business of one or more of these borrowers.
Investments. We are also exposed to credit risk through our investment portfolios. Our policies restrict the acquisition of investments to high-quality, short-term money market instruments and high-quality long-term securities.
The following table presents the unsecured investment credit exposure to private counterparties, categorized by the domicile of the counterparty's ultimate parent, based on the lowest of the counterparty's NRSRO long-term credit ratings, stated in terms of the S&P equivalent. The table does not reflect the foreign sovereign government's credit rating ($ amounts in millions).
March 31, 2019 | AA | A | Total | |||||||||
Domestic | $ | — | $ | 2,166 | $ | 2,166 | ||||||
Australia | 850 | — | 850 | |||||||||
Singapore | 400 | — | 400 | |||||||||
Total unsecured credit exposure | $ | 1,250 | $ | 2,166 | $ | 3,416 |
A Finance Agency regulation provides that the total amount of our investments in MBS and ABS, calculated using amortized historical cost, must not exceed 300% of our total regulatory capital, as of the day we purchase the securities, based on the capital amount most recently reported to the Finance Agency. At March 31, 2019 these investments totaled 293% of total regulatory capital. Generally, our goal is to maintain these investments near the 300% limit in order to enhance earnings and capital for our members and diversify our revenue stream.
The following table presents the carrying values of our investments, excluding accrued interest, grouped by credit rating and investment category. Applicable rating levels are determined using the lowest relevant long-term rating from S&P, Moody's and Fitch Ratings, Inc., each stated in terms of the S&P equivalent. Rating modifiers are ignored when determining the applicable rating level for a given counterparty or investment. Amounts reported do not reflect any subsequent changes in ratings, outlook, or watch status ($ amounts in millions).
Below | ||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||
March 31, 2019 | AAA | AA | A | BBB | Grade | Total | ||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||
Interest-bearing deposits | $ | — | $ | 1 | $ | 316 | $ | — | $ | — | $ | 317 | ||||||||||||
Securities purchased under agreements to resell | — | 3,297 | — | — | — | 3,297 | ||||||||||||||||||
Federal funds sold | — | 1,250 | 1,850 | — | — | 3,100 | ||||||||||||||||||
Total short-term investments | — | 4,548 | 2,166 | — | — | 6,714 | ||||||||||||||||||
Long-term investments: | ||||||||||||||||||||||||
U.S. Treasury obligations | — | 1,122 | — | — | — | 1,122 | ||||||||||||||||||
GSE and TVA debentures | — | 4,338 | — | — | — | 4,338 | ||||||||||||||||||
GSE MBS | — | 6,136 | — | — | — | 6,136 | ||||||||||||||||||
Other U.S. obligations - guaranteed RMBS | — | 3,389 | — | — | — | 3,389 | ||||||||||||||||||
Total long-term investments | — | 14,985 | — | — | — | 14,985 | ||||||||||||||||||
Total investments, carrying value | $ | — | $ | 19,533 | $ | 2,166 | $ | — | $ | — | $ | 21,699 | ||||||||||||
Percentage of total | — | % | 90 | % | 10 | % | — | % | — | % | 100 | % | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||
Interest-bearing deposits | $ | — | $ | 1 | $ | 1,210 | $ | — | $ | — | $ | 1,211 | ||||||||||||
Securities purchased under agreements to resell | — | 3,213 | — | — | — | 3,213 | ||||||||||||||||||
Federal funds sold | — | 1,630 | 1,455 | — | — | 3,085 | ||||||||||||||||||
Total short-term investments | — | 4,844 | 2,665 | — | — | 7,509 | ||||||||||||||||||
Long-term investments: | ||||||||||||||||||||||||
GSE and TVA debentures | — | 4,277 | — | — | — | 4,277 | ||||||||||||||||||
GSE MBS | — | 5,632 | — | — | — | 5,632 | ||||||||||||||||||
Other U.S. obligations - guaranteed RMBS | — | 3,469 | — | — | — | 3,469 | ||||||||||||||||||
Total long-term investments | — | 13,378 | — | — | — | 13,378 | ||||||||||||||||||
Total investments, carrying value | $ | — | $ | 18,222 | $ | 2,665 | $ | — | $ | — | $ | 20,887 | ||||||||||||
Percentage of total | — | % | 87 | % | 13 | % | — | % | — | % | 100 | % |
Mortgage Loans Held for Portfolio. The following table presents the changes in the LRA for original MPP and Advantage MPP ($ amounts in millions).
Three Months Ended March 31, 2019 | ||||||||||||
LRA Activity | Original | Advantage | Total | |||||||||
Liability, beginning of period | $ | 7 | $ | 167 | $ | 174 | ||||||
Additions | — | 3 | 3 | |||||||||
Claims paid | — | — | — | |||||||||
Distributions to PFIs | — | — | — | |||||||||
Liability, end of period | $ | 7 | $ | 170 | $ | 177 |
Derivatives. The following table presents key information on derivative positions with counterparties on a settlement date basis using the lowest credit ratings from S&P or Moody's, stated in terms of the S&P equivalent ($ amounts in millions).
March 31, 2019 | Notional Amount | Net Estimated Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparties | Net Credit Exposure | ||||||||||||
Non-member counterparties: | ||||||||||||||||
Asset positions with credit exposure | ||||||||||||||||
Uncleared derivatives - AA | $ | 282 | $ | 3 | $ | — | $ | 3 | ||||||||
Uncleared derivatives - A | 6,047 | 6 | 2 | 8 | ||||||||||||
Cleared derivatives (1) | 21,232 | 16 | 139 | 155 | ||||||||||||
Liability positions with credit exposure | ||||||||||||||||
Uncleared derivatives - AA | 350 | (1 | ) | 1 | — | |||||||||||
Uncleared derivatives - A | 11,877 | (46 | ) | 56 | 10 | |||||||||||
Total derivative positions with credit exposure to non-member counterparties | 39,788 | (22 | ) | 198 | 176 | |||||||||||
Total derivative positions with credit exposure to member institutions (2) | 33 | — | — | — | ||||||||||||
Subtotal - derivative positions with credit exposure | 39,821 | $ | (22 | ) | $ | 198 | $ | 176 | ||||||||
Derivative positions without credit exposure | 138 | |||||||||||||||
Total derivative positions | $ | 39,959 |
(1) | Represents derivative transactions cleared by two clearinghouses (one rated A+ and the other unrated). |
(2) | Includes MDCs from member institutions under our MPP. |
Replacement of the LIBOR Benchmark Interest Rate. In July 2017, the Financial Conduct Authority ("FCA"), a regulator of financial services firms and financial markets in the UK, announced that it will plan for a phase-out of regulatory oversight of LIBOR interest rate indices. The FCA indicated that it will cease persuading or compelling banks to submit rates for the calculation of LIBOR after 2021, and that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The Alternative Reference Rates Committee has proposed SOFR as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018.
Most of our advances, investments, consolidated obligation bonds, derivative assets, derivative liabilities, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. As a result, we are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement on an ongoing basis. We have also developed an evolving transition plan that will change with market developments and member needs. The key components of our LIBOR replacement plan are: exposure, fallback language, information technology systems preparation, and balance sheet strategy. We have assessed our current exposure to LIBOR including completing an inventory of all financial instruments impacted and identifying financial instruments and contracts that may require adding or adjusting fallback language. We are assessing our operational readiness including potential effects on core Bank systems and replacing LIBOR references in policies and procedures. From a balance sheet management perspective, we have participated in the issuance of SOFR-indexed debt. Additionally, we have implemented OIS as an alternative interest rate hedging strategy for certain financial instruments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Measuring Market Risks
To evaluate market risk, we utilize multiple risk measurements, including duration of equity, duration gap, convexity, VaR, earnings at risk, and changes in MVE. Periodically, we conduct stress tests to measure and analyze the effects that extreme movements in the level of interest rates and the shape of the yield curve would have on our risk position.
As part of our overall interest-rate risk management process, we continue to evaluate strategies to manage interest-rate risk. Certain strategies, if implemented, could have an adverse impact on future earnings.
Market Risk-Based Capital Requirement. When calculating the risk-based capital requirement, the VaR comprising the first factor of the market risk component is defined as the potential dollar loss from adverse market movements, for a holding period of 120 business days, with a 99% confidence interval, based on those historical prices and market rates. The table below presents the VaR ($ amounts in millions).
Date | VaR | |||
March 31, 2019 | $ | 310 | ||
December 31, 2018 | 298 |
Market Value of Equity. MVE represents the difference between the estimated market value of total assets and the estimated market value of total liabilities, including any off-balance sheet positions. It measures, in present value terms, the long-term economic value of current capital and the long-term level and volatility of net interest income.
We also monitor the sensitivities of MVE to potential interest-rate scenarios. We measure potential changes in the market value to book value of equity based on the current month-end level of rates versus large parallel rate shifts in rates. Our board of directors determines acceptable ranges for the change in MVE for 200 bps shock scenario.
Key Metrics. The following table presents certain market and interest-rate metrics under different interest-rate scenarios ($ amounts in millions).
March 31, 2019 | Down 200 (1) | Down 100 (1) | Base | Up 100 | Up 200 | |||||||||||||||
MVE | $ | 3,305 | $ | 3,255 | $ | 3,195 | $ | 3,103 | $ | 3,059 | ||||||||||
Percent change in MVE from base | 3.5 | % | 1.9 | % | 0 | % | (2.9 | )% | (4.3 | )% | ||||||||||
MVE/Book value of equity (2) | 99.8 | % | 98.2 | % | 96.4 | % | 93.7 | % | 92.3 | % | ||||||||||
Duration of equity (3) | 3.2 | 1.8 | 2.3 | 2.9 | (0.5 | ) |
December 31, 2018 | ||||||||||||||||||||
MVE | $ | 3,326 | $ | 3,276 | $ | 3,206 | $ | 3,110 | $ | 3,080 | ||||||||||
Percent change in MVE from base | 3.7 | % | 2.2 | % | 0 | % | (3.0 | )% | (3.9 | )% | ||||||||||
MVE/Book value of equity (2) | 103.3 | % | 101.8 | % | 99.6 | % | 96.6 | % | 95.7 | % | ||||||||||
Duration of equity (3) | 1.3 | 1.7 | 2.8 | 2.4 | (0.3) |
(1) | Given the low interest rates in the short-to-medium term points of the yield curves, downward rate shocks are constrained to prevent rates from becoming negative. |
(2) | The change in the base MVE/book value of equity from December 31, 2018 resulted primarily from the change in market value of the assets and liabilities in response to changes in the market environment, changes in portfolio composition, and our hedging strategies. |
(3) | We use interest-rate shocks in 50 bps increments to determine duration of equity. |
Duration Gap. The base case duration gap was 0.07% and 0.09% at March 31, 2019 and December 31, 2018, respectively.
For information about our use of derivative hedges see, Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Use of Derivative Hedges in our 2018 Form 10-K.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and (b) accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, to allow timely decisions regarding required disclosures.
As of March 31, 2019, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the principal executive officer), Chief Financial Officer (the principal financial officer) and Chief Accounting Officer (the principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.
Internal Control Over Financial Reporting
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in rules 13a-15(f) and 15(d)-15(f) of the Exchange Act, that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures and other internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Additionally, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, we may from time to time become a party to lawsuits involving various business matters. We are unaware of any lawsuits presently pending which, individually or in the aggregate, could have a material effect on our financial condition or results of operations.
Item 1A. RISK FACTORS
There have been no material changes in the risk factors described in Item 1A. Risk Factors of our 2018 Form 10-K.
Item 6. EXHIBITS
EXHIBIT INDEX
Exhibit Number | Description | |
31.1 | ||
31.2 | ||
31.3 | ||
32 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS | ||
May 9, 2019 | By: | /s/ CINDY L. KONICH |
Name: | Cindy L. Konich | |
Title: | President - Chief Executive Officer | |
May 9, 2019 | By: | /s/ GREGORY L. TEARE |
Name: | Gregory L. Teare | |
Title: | Executive Vice President - Chief Financial Officer | |
May 9, 2019 | By: | /s/ K. LOWELL SHORT, JR. |
Name: | K. Lowell Short, Jr. | |
Title: | Senior Vice President - Chief Accounting Officer |